Deceptive Calm Continues
Italy finally has a new prime minister, Enrico Letta, who is expected to be supported both the center-left (its leader Bersani has recently resigned, as he was unable to get the bloc to vote for his choices for the job of president) and Berlusconi's center-right coalition. Apparently this has given fresh impetus to the buying of peripheral bonds in the euro area. Consequently, credit default swaps and other measures of systemic stress remain subdued. However, there are still technical divergences that must be considered worrisome and inflation expectations in Europe continue to plunge (this is often a precursor to credit stress). Moreover, safe haven debt continues to enjoy a good bid. We ask again, if everything is truly fine, then why is this so? Something obviously does not compute here.
Below is a selection of our customary update of credit market charts: CDS on various sovereign debtors and banks, bond yields, euro basis swaps and a few other charts. Charts and price scales are color coded (readers should keep the different price scales in mind when assessing 4-in-1 charts). Where necessary we have provided a legend for the color coding below the charts. Prices are as of Tuesday's close.
5 year CDS on Portugal, Italy, Greece and Spain – trending down again
