Curve Goes Nuts) on the inversion (blowout) of BP’s 1
year/10 year spread. At one point the short date paper was yielding 10%
while the long dated stuff was at 7%. You don’t see this too often. When
you do, it is always a giant red flag waving “Risky”.
What is the price of a 5% AA 10 year if market forces bring it to an 8%
yield? 80% of par. As a result, there is a 20% upside to this bond. What
is the upside on a one-year investment at 10%? 10%. Therefore short
date paper has half the return potential. Who would want that?
Short-term yields explode as a result.
It works on the downside as well. If there were a default that led to a
payout of 60% of par the guy who buys at 80% loses a quarter of his
money. The holder of the short-term stuff pays 90% and loses a third of
their money.
The BP inversion is a function of the uncertainty the company faces. I
doubt there was much liquidity. That said, the market was making a
prediction of a default. When the dust settles in a few days it will be
interesting to see if the inversion is sustained.
There is another case of an inversion in the making that is worth
watching. Rather than a one-day explosion like BP this one has been on a
slow burn. It is every bit a red flag.
The following is a “Before and After” look at Spanish and Greek bonds.
First consider Greece on 5/2 (white) and 6/16 (blue). You can see how
the yield curve inverted from 2yr -10. Today it has “normalized” at very
high rates. The market perception is that the risk of default is less.
This is backed up in Greek CDS pricing.
Now consider Spain on 6/15 (yellow) and six weeks ago (red). The
disorderly market that Greece suffered is not evident, yet. I see a
steepening curve, higher rates across all maturities and a sharp
flatting around the 2-5 year. This is where the inversion will take
place.
The following is a different look of the 2s/5s for Spain. The spread is
still positive (65bp) but we just broke levels not seen since the world
was ending in 2008.
This deterioration is happening during a ‘risk on’ period for the
markets. When the sentiment pendulum swings the other way in a few weeks
Spain will face an inverted curve. This will shut them out of the
long-term debt market. Call that a crisis. The only thing preventing it
from happening is the ECB. They are buying sovereign paper to the tune
of E40-50b per week of late. I don’t believe they can keep up that level
of buying for another month.
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Noticed BP shares are rallying in Europe....go figure!
EURO bullish warnings mentioned earlier, have strengthened today. Vice versa for the USD index of course.
I have detected EURO buying support for several weeks now.
XAUEUR daily chart gives bearish warnings as of today.
This could be an important development.
The proprietary indicators I use in my technical analysis can identify trend changes before they occur.
http://stockmarket618.wordpress.com
dupe.
- we're so sorry uncle albert, we haven't done a bloody thing all day - we're so sorry...
- 1945 Typhoon -
http://www.youtube.com/watch?v=X95kSfi1oSU
-----------------
http://www.youtube.com/watch?v=XsWufNDJl4M
http://www.youtube.com/watch?v=5duUcZUMaHQ
BK, we are privileged here to have your insight. 180 days notice required to leave ZH. Tx a million.
ROLMFAO - Two Hurricane Flags up a pole. Prophetic!!!
That's the symbol for a hurricane. You have to have two. One is a tropical storm warning.
I'm calling Bullshit on the $20 Billion fund. Here's my scenario. BP recently hired Goldman. Next step, pledge collateral - sell bonds to raise the $20B. Pledge enticing collateral like some land leases with "proven" oil reserves, hehe. Whatever isn't unloaded on the widows and illinois teachers pension fund goes to JPMorgan on behalf of the Fed. A few phone calls and --- done.
DEEPWATER REAPER:
http://williambanzai7.blogspot.com/2010/06/deepwater-reaper.html
The reason CDS are behaving like Nasdaq smallcaps circa 1999/2000 is that they have attracted the same type of trader; thinly-capitalised numpties who trade after the news hits the wires.
Otherwise, you would expect to see at least a MODICUM of forward-looking behaviour from the CDS market... but instead, the only CDSs that move hard are the ones that are already in the news. Those get crushed (i.e., CDS spike), and the last fuckheads on board get creamed (where are Greek CDS now? Imagine being the dickhead who sold short-term Greek debt a month or two ago when it was all in the news every day: yet another vindication of the Transom Axiom: if 4 finance journalists are babbling about something, get on the other side STAT)
I wrote that France was in as bad financial shape as Spain, and that both ought to be junk: that was when people were still talking about Iceland and Greece (and before ZH invented the best.acronym.ever... STUPID)... the obviousness at the time was as plain as day, and still is: yet CDS over French sovereign debt are nowhere near crisis.
When there is Dumb Money at Work and everyone is trading based on their real-time news feed, you get exacerbated moves in the at price extremes in the direction of the extreme.
And the last numpties on board - the ones that generate the last blowoff top (or bottom) are the ones who get gutted. I would buy a normalisation of BP's curve in a heartbeat: only a journalist would be stupid enough to think that BP will fund this (mythical) escow account using short term debt.
Cheerio
GT
"Axiom: if 4 finance journalists are babbling about something, get on the other side STAT)"
No shit sherlock....it's the cover article axiom.
"yet CDS over French sovereign debt are nowhere near crisis."
Wait for it.
" I would buy a normalisation of BP's curve in a heartbeat"
Why?
"only a journalist would be stupid enough to think that BP will fund this (mythical) escow account using short term debt."
Mythical is the key word there. Don't count on BP to fund it at all. So perhaps I agree.
Geoffrey, I was wondering if you are a middle school teacher?
"thinly-capitalised numpties who trade after the news hits the wires."
You gotta understand what happened to reuters and all the news services. They set up news aggregator sites that pulled in all kinds of information from what the president said to so and so on a plane trip to blah blah to you name it. What people don't understand is those are now all aggregated in India and they are also manipulated on what gets written and monitered for how many people read it etc.
So ya numpty dumpty sat on a wall.
numpty pumpty avoided a fall
numpty dumpty moves before the candlestick
So there ya go.