More on Spain, Switzerland, The U.K., And the Fallacy of Composition

The sell-off in government bonds has gone completely global as concerns over Federal Reserve tapering of monetary stimulus infect the market. Everywhere this morning, bond yields are up huge as investors dump sovereign debt. In the United States, the 10-year yield is up 6 basis points to 2.26%, its highest level in over a year.

The ECB stepped into the fray once again today but the the results of the Spanish debt auction today speak for themselves. The rate on 10-year bonds is close to touching the 7% mark. The BBC reports on the "Dreadful Result" The Spanish government sold 3.56bn euros (£3.04bn; $4.79bn) worth of bonds out of a maximum target of 4bn euros. The auction attracted bids worth 1.5 times the securities offered. The so-called bid-to-cover ratio was down from 1.8 in October.

Marc Chandler submits:Three separate developments underscore the risk aversion theme today: Disappointing Alcoa (AA) earnings to kick off the US earnings season, the continued snugging of Chinese rates, including a 50 bp hike in reserve requirements (for large banks), and new worries about the outlook for Greece.The EU has raised questions over the credibility of Greek macro-economic statistics after having revised its budget deficit

France has encouraged Spain to apply for aid as soon as possible. In Germany, Wolfgang Schäuble wants anything but a timely application. Note that unless a country requests a bailout, and agrees to terms set by the IMF (something Spain does not want to do), the entire OMT plan of Draghi is useless. Finally, at the latest EU finance meeting on Saturday, battles between eurozone and non-eurozone countries erupted over the banking union.

Reuters has an interesting Interactive Eurozone Bank Stress Test Adjust the Tier 1 Capital Ratio and Sliders for Haircuts and out pops an answer. This is what I came up with. It is hard to get the sliders to stop exactly on the spot you want.

Marc Chandler submits:Some reports suggest that the stress that European banks may be tested for includes a 17% loss on Greek bonds and a 3% loss on Spanish bonds. German bunds and possibly French bonds will not be stressed--that is to say the stress test will not include a long on bonds from those two.While these details have yet to be confirmed, the stress on Greek and Spanish bonds seem too modest. Greece pays 750 bp more than Germany on 10-year bonds today.

Add France to the list of eurozone countries with negative short-term interest rates. The Wall Street Journal reports France Joins Germany to Sell T-Bills At Negative Yield France joined a handful of euro-zone countries Monday in selling short-term debt at negative interest rates as investors seek alternatives to expensive German and Dutch debt.