The much dreaded LCH margin hike came and went and while initially the market participants thought it was just a joke as nothing bad is ever allowed to happen anymore in these neverneverland markets, a few hours later the realization that this is all too real has finally dawned. The result is an epic bloodbath everywhere, but nowhere more so than in Europe, where one can kiss Italian bonds goodbye, and shortly French too, as the bond vigilantes demand that the ECB print now or else. Visually this is presented as follows: a 30 point drop in the ES, an unseen collapse in Italian bonds, and an explosion in the French-Bund spread. And since nobody can demonize CDS any more, we expect Europe to make selling sovereign bonds illegal next.

ES:

BTPs price:

France-Bund spread:

Commentary from Bloomberg:

LCH Clearnet SA increased charge levied on clients to trade Italian government bonds {FIFW NSN LUE2U16S972B <go>}

With Berlusconi expected to resign after approval of austerity measures, market left to wonder whether new government can alter trajectory of debt crisis

Italian 10-yr spread to Germany +74bps to record 543bps, 2-yr spread +80bps to record 694bps

Spanish French yield to Germany spreads significantly wider; with 2- and 10-yr spreads for both countries at records

European equity bourses, U.S. futures all down significantly, 1.6% to 3.3%

German bond yields down modestly, 2-6bps, while Treasury yields down 0.1 to 10bps, with 10-yr testing below 2.0%

US$, yen outperforming significantly in generalized risk aversion

And some thoughts from RBS:

LCH’s increase in initial margin calls on Italian govt bonds will likely hit Italian banks the hardest, Adam Cole, strategist at RBC, writes in note.

Move will make using BTPs as collateral to raise cash in repo mkts more expensive

LCH’s move anticipated for some time though still sufficient to push spreads to record levels, outright yields to new highs

Berlusconi’s resignation diluted by lack of clarity

Possibilities range from technocrat govt (most mkt positive) to new elections (most negative)

Bottom line: it turns out that pushing back reality indefinitely always comes back to bite you in the ass eventually.