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European Bond Spreads Leak Wider Following Portuguese Bill Auction
Today the PIIGS are back at the ECB subsidy trough with Portugal taking center stage with its E500 million 6-month bill auction. The next country to implode sold E500mln of 6-month Bills, and while the bid to cover was just a slightly better 2.6 compared to the 2.4 before, the yield again surged, hitting an unsustainable 3.686% versus 2.045% previously. The net result of this jump in yields is that peripheral spreads have once again commenced leaking wider, with the Greek spreads to Bunds pushing to a new record wide at 974 bps, a 10 point move. This is hardly the last we have heard of record Greek spreads it, and while it is very feasible we will see a four digit spread in the next few days, who really care anymore. After all it is just the ECB that will end up holding the toxic paper.
Elsewhere, Germany also proceeded with its first bond issuance of the year, selling nearly E4 billion in 10 year bonds. From Market News:
The German federal government topped up its 2.50%-coupon, January 2021 Bund by E3.916 billion at a minimum price of 96.79 the Bundesbank announced Wednesday.
The average yield on the top-up of the 10-year Bund was 2.87%, up from 2.59% at the bond's initial auction November 24.
The weighted average price came to 96.81, and the government accepted 100% of bids at the minimum price.
There were a total of E6.290 billion in bids for today's sale, resulting in a bid/cover ratio (excluding Bundesbank retention) of 1.6 up from 1.2 on November 24. It was the first covered (i.e. total bids exceeded the announced volume) capital market auction since November 10.
A spokesman for Germany's Federal Finance Agency wrote after the auction that the results were a "robust start" for the year.
Total bids included E2.87 billion in competitive bids and E3.42 billion in non-competitive bids. The German government accepted 80% of the non-competitive bids. The bonds mature on January 4, 2021 and are strippable.
The government retained E1.084 billion (or 21.7%) of the issue for its open market operations, bringing the total volume of the latest tranche to E5 billion, as expected. Including the E6 billion of the bond outstanding, total issue volume is now E11 billion.
And as we have been disclosing for the past few months, the big race in Europe this year will be between banks, which have trillions in debt to roll or refinance, and countries, which, amusingly, also have trillions in debt to roll and refinance.... and both have a very limited purchasing audience. Bloomberg has put together a good summary on the game theory considerations in a year in which very soon everyone will migrate to the "Defect" field.
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I know this is a very basic question but can't the ECB just buy PIGG bonds forever? Is it possible we never see a debt restructuring here? I mean there just not going to let it happen, whats to stop them from doing what they are doing to infinity?
In a word, no.
At the moment the ECB is trying to sterilize all of these purchases by sucking liquidity out of the banking system to offset their purchases of peripheral EZ bonds. Last week, they were unable to fully sterilize, as there was insufficient interest from the banks.
If the ECB pushes ahead with unsterilized purchases of EZ Govt bonds, this amounts to pure money printing and the inflation-phobic Germans will (quite rightly) throw their toys out of the pram. I do not think Angela Merkel will be able to overcome this opposition from within Germany.
My question is if Germany wants a weaker Euro, would not inflation bring about that effect? Would not this be desirable in the short term?
6.29 billion worth of bids for 3.916 billion worth of paper!? With another 1.084 billion just in case they need it later!
Must be good to be the government. I wouldn't be surprised if they do indeed think they are gods.
It is this statistic that bothers me the most....bid ratios....they want to show us so many people, entities want this stuff....when we all no it is toxic at best...it seems very wierd to me that there is that much "demand" for the bonds ..unless there is some pre arrainged agreement or back door policy...IMHO...but then again I am into PM´s...
It certainly displays very 'bubble' like behaviour, no?
The situation in Greece is deteriorating at an even faster rate than is implied here. According to the Notayesmanseconomics web blog this is happening.
http://notayesmanseconomics.wordpress.com
I wish the ECB would be more transparent with regard to bond purchases . It really annoys me that they don't clarify which bonds they're buying , only the aggregate final amount . Even the Fed reveals which Treasuries it's accumulating .
Reuters:
"EU executive says national authorities should get powers to write down senior debt at ailing banks – Draft paper.
All bondholders should be forced to take losses in an ailing bank under draft European Union proposals aimed at avoiding taxpayers again having to fund bailouts in the next crisis.
EU executive commission to publish consultation paper as soon as this week, to shape its crisis management legislative proposals later in year.
The paper obtained by Reuters says writing down a bank’s stock and subordinated debt may not be enough at times, and that national resolution authorities will need “additional writeoff” powers.
EU executive proposes a tiered model beginning with writedowns of equity and and subordinated debt with senior debt next in line.
Draft paper says “Building on the minimum powers above, the first ‘comprehensive’ approach aims to make a broad range of senior creditors face the real risk associated with bank failure.”
Interesting if it happens...
and this:
Swiss central bank refuses to touch Irish state bonds - Government debt and bank bonds here are excluded from a list of assets viewed as eligible for 'repo' deals:http://tinyurl.com/27daztg
This writing down of debt and giving senior bond holders a haircut is good, but it won't go through. Because the banks in question who loaned a ton of money to the PIIGS are German and French and UK banks.