Fixed Interest analysts at Société Générale with a hardly ringing endorsement of Bonos:

  • Luckily for Spain, the risk-on mood is masking the threats ahead. Investors have yet to lighten Bonos much, highlighting the risks further.

SG then delve into the Spanish developments, starting with some refreshing honesty:

  • To be honest, we have very little idea how politics in Spain will evolve.
  • There are considerable financial implications whatever happens.
  • The lack of visibility still suggests that investors adopt prudent positioning, which they are only starting to do on the whole

More: (in brief):

markets background is rather risk-on

  • rising global stock markets,
  • still fair growth and falling employment in Spain
  • fortunate circumstances are for the time being masking the negative implications for Bonos arising from the lack of a democratic process in the resolution of the dispute in Catalonia

Many investors only this week have become alarmed by the dangers and have begun to short Bonos

  • From a positioning perspective, there is ample capacity for this move to continue
  • But the opposite is not true: if a magic wand could be waved and a solution found, Bonos have little capacity to bounce back given that the sell-off so far is limited

All three rating agencies this week sounded rather negative on the outlook for Spain should the separatists get their way

  • we believe Spain would have been upgraded last week had the Catalonia issue not spoilt the outlook
  • There is also interest in how Catalonia might be rated in an independence scenario


Bonos = Spanish Government Bonds

If the situation deteriorates further I'd expect to see more selling of Bonos, which should be a negative input for the euro.

(ps. I use the word 'should' very specifically when I do use it here at ForexLive - those who have done Greg's course &/or read his book will get it ... in a nutshell it is what 'should', in theory happen)