This post from Zerohedge explains albeit in highly technical language, why long-term Spanish bonds are rallying today, despite an abysmal debt auction this morning. The reason according to the ZH article is because some moron at a bank is still willing to sell CDS (bond insurance) against long-term bonds, despite the yield on the 10-year being above the 7% red zone level. Seven % is considered red zone, because above that level most governments cannot service the interest on their debt.
What is most amazing is that these CDS (bond insurance contracts) are still (mis)priced at a low enough level that it somehow makes buying Spanish bonds in this 'red zone' still worthwhile ! Sound familiar ? It's subprime all over again, only this time involving sovereign debt i.e. the stakes are orders of magnitude higher.
The key point is that these CDS contracts are the direct linkage between Spain and the rest of the world's financial markets. It's not just Spanish banks writing CDS - U.S. banks have this exposure as well, although, no one knows with certainty, how much exposure. Rewind a few weeks to the JP Morgan debacle, which is still shrouded in secrecy so the other sharks on Wall Street don't find out which (existing) position blew up on them, and circle in for the kill.
As long as we have greedy morons at banks willing to take massive risks with other people's money, then you know we are only one 'bad day' away from another bank exploding all over itself...
