It didn’t take long for the Italian “budget saga crisis” to resurface as a hot topic for the markets. During the last few days the sell-off focus had shifted to other themes, but today the Italian focus was back with Italian 10-year yields spiking by 14 points. The 10-year yield is now trading at levels last seen in 2014.

Note that we trade substantially higher than during the “Italexit” period earlier this year. This latest spike is big, but even more importantly, the market as a whole is rather nervous and any “spillover” effect could be magnified quickly.

The German versus Italian 10-year spread continued widening and is now at 323 bps.

Over past weeks Spanish yields have climbed without many people commenting on this fact, but that changed today. Spanish yields are trading at much lower levels than Italian yields, but it is never a good thing when people start mentioning “spillover” effects and the return of the Med stress situation. Spain has done many things different to Italy since the financial crisis, but the recovery is fragile still. Spain is not in pain as it was a few years ago, but given the political situation, they can’t afford spiking yields from a sentiment aspect.

Rising yields in Spain was not the only problem today. We also had the court ruling of the mortgage taxes for homebuyers. Basically, the cost that was earlier paid by the customer needs to be paid by the bank. This tax varies depending on the region. In Andalucía for example, this tax is 1.5% of the mortgage value. An amount not to be neglected.

Spanish banking stocks fell sharply, with the biggest moves lower among the smaller banks, down some 6%, but we saw Santander and BBVA fall by almost 3% as well.

European credit, iTraxx main, has been one of the early indicators in these last equity moves. Interestingly enough the recent equity sell-off felt rather “isolated”, but today credit started moving well ahead of the equity move that eventually took place.

The calm we saw during the past 48 hours was quickly broken and volatility has once again regained the power of this market.

Source: charts by Bloomberg