The reality is Greece is largely noise. Greece will eventually leave the Eurozone, but not this month. The hardliners inside Greece will realize they need some time to organize. The markets will have spooked the hardliners outside of Greece that they should play nice for a little bit, because forcing Greece out now won’t do them any good whatsoever.
With Greece largely a sideshow at this stage, the attention is really focused on Spain and Italy. The fact that Greece might lead the way out of the Euro is having a big impact on these countries. That realization combined with the already obvious problems at the sovereign and bank level caused markets to sell off. The Spanish 10 year bond is back above 6%, dropping 20 bps today, which is a significant move. As we wrote about last Friday, there are no natural buyers, so this move occurred in an illiquid market. There is more room to run, but moves in Spanish and Italian bonds are already starting to have a less direct impact on stocks than they did earlier in the morning.
I don’t think we will see a serious rebound in Spanish and Italian yields until the ECB intervenes. They will need to step up and draw a proverbial line in the sand. My guess is that won’t occur until 6.25% on the Spanish 10 year. Once they do step in, watch out a big gap better on the bonds. Just as there are no natural buyers, there will be no natural sellers. The shorts will want to cover. No one who is short is going to want to fight the ECB, at least not on their first day of purchases, so they will become buyers themselves. The dealers will sell what little inventory they have to the ECB and will do everything they can to drive up prices and get the best execution possible on their small positions. No Spanish or Italian bank is going to sell their inventory for a loss. They might not be adding, but they sure as heck aren’t selling.
Thanks to BrotherJohnF