“The big rally in European risk assets like stocks took a breather late last week.
Citi strategist Robert Crossley is watching flows in sovereign bond markets, and he warns that problems are surfacing in Europe.
In a note to clients titled “Cracks starting to appear in Europe,” Crossley looks at demand for European sovereign debt – which just turned negative for the first time in three months.
Although the drop in demand has been led by a retreat from safe-haven investments in “core” sovereign debt – like that of Germany – the issue is where the money has been going.
Certain sovereign debt markets in the euro periphery – Spain, for one – have been the big winners. Demand for the periphery remains positive, notes Crossley, but that could change pretty quickly:
Although demand for peripherals has fallen, like the core, it remains positive. It is this cumulative yield-seeking positioning that concerns us in the current environment where the risk-on mood is turning and investors are reassessing the risk-reward of risk positions with the wash-out of carry trades in short-dated EUR swap forwards, a strengthening FX rate, and risks surrounding comments coming from the forthcoming ECB meeting.
Sure enough, there is one market in particular that has Citi particularly wary: Spanish sovereign debt.
As the chart below shows…”
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