Archive - Jun 30, 2011 - Story

Creditex has just reported the preliminary results in the CDS settlement auction of Allied Irish Banks. According to initial data submitted to ISDA (for more on the mechanics of CDS auctions read here) on behalf of buyers and sellers of CDS into the auction, the AIB senior bonds will see a final recovery value of about 71.375 while the sub will barely recover 10%, or 12 cents on the dollar to be precise. Alas this is likely indicative of market clearing levels on most European bank bond liabilities due to the incestuous circular nature of European bank assets and liabilities where everything is interconnected in one massive closed loop. And yes, one wonders just which regulating central bank allowed this bank's debt to be pledged as collateral for as long as it did.

Whether the move in overnight Libor is due to an end of quarter window dressing scramble by the banks who in a Repo 105 fashion are doing their best to seem healthy, or it is due to the recent evaporation of European money market funds which are going into US securities, leaving Europe high and dry, is unclear; what is clear is that overnight EUR Libor just doubled, exploding by an unprecedented 85.5 bps to 1.78%, the highest it has been since early 2009 (see chart). Why is this troublesome: because the USD overnight Libor is at 0.128%, which is to be expected courtesy of the recent very much expected extension on the Fed's swap lines with European banks. But it does beg the question: instead of the traditional shortage of USD on every risk precipice, is there suddenly a massive black hole in overnight EUR funding, and has Chinese buying of euros by the bushel backfired and is about to further hobble European, and US, liquidity. As a reminder yesterday, General Collateral traded at the lowest rate ever, or -0.002%. Alternatively, this may be a function of the ECB providing less than expected euros in its latest 91 Day Long-Term Refinancing Operation, which saw 265 bidders scramble to secure €132 billion from the ECB. And meanwhile in China, despite all the recent attempt to reestablish liquidity in the market, the 7 and 14 Day SHIBORs both broke their recent downward trend. If this is all simple end of quarter liquidity shoring up, that's fine: thing should get back to normal tomorrow. If, however, the liquidity picture does not change on July 1, it may be time to step away from the keyboard and at least get to know where the nearest emergency exit is.

Once again the world will be watching Greece although with far less interest as the parliament is expected to pass the austerity bill with voting expected to commence on each individual point in the mid-term package at about 8 am Eastern. In the meantime there will be quite a bit economic data, such as Initial Claims, the critical Chicago PMI, the Kansas City Fed Index, as well as various Fed speeches. Most importantly, today is the day when the Fed stops adding net liquidity to the market with the last POMO due at 11:00 am. Expect another window dressing meltup into the afternoon at which point anything goes.

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