FRA-OIS Spread Jumps To 2011 Wides As Greek CDS At Unprecedented Levels

Tyler Durden's picture

That Greek CDS just hit the now meaningless level of 2,050 bps or up 280 bps for the day is now longer relevant: the Greece default is now fully priced in. What however has yet to be priced in is what will happen to liquidity when this now inevitable event does occur. To say that the impact on stocks and the EUR would be disastrous is an understatement. So while stocks are enjoying the worst two day pair of news in years by surging on expectations of yet another Chinese bailout of Greece (because the first two worked so great), here is a snapshot of the FRA-OIS spread we discussed yesterday, and which today hit a 2011 high of 34, since declining modestly to 28. Unless something totally unprecedented appears and manages to once again delay fears of a Greek bankruptcy for another 6 months, this spread will continue making overnight funding for European, and soon US, banks, rather problematic.


And Longer-Term:

True, over the long-term the absolute level is not yet threatening for now, what however is, is that banks have massive levered carry positions in the other direction, and the more this spread contracts as it did through early June, the greater the pain when it unwinds. As such, the 100% widening in the US FRA-OIS over the past few days, is currently generating massive pain across Wall Street trading desks, forcing more unwinds, and so forth in the typical closed loop pattern.

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EscapeKey's picture

Can I invest in the 2nd derivative? I think tomorrows increase will be even greater.

trav7777's picture

that's the first derivative

the downside should be huge when the CBs make cash as available as the digits in a computer that they are

EscapeKey's picture

If tomorrows increase is greater, it will represent a positive 2nd derivative:


2200 <-- price increase: 200 (1st derivative)

2500 <-- price increase: 300, change in 1st derivative (2nd derivative): 100


trav7777's picture

I never said it wouldn't be positive.  You want to trade the first derivative, which is going up.  The 2nd derivative can go down if the rate of change of the rate of change decreases, meaning the increase in price itself increases less.

BTW, your "derivatives" are just flat wrong...derivatives are a curve slope, not a scalar

EscapeKey's picture

No, you said I was referring to the 1st derivative, which I wasn't. And a slope at a discrete sampling point (one instance in time, in this case) - which was what the discussion was about - is very much a singular value.

jerry_theking_lawler's picture


you must be an mathematician or engineer....they/we 'truly' understand concepts of mathematics.

monopoly's picture

Very comfortable with my FAZ here. And there goes RIMM, NExt?

DoChenRollingBearing's picture

The simple answer is usually the right one.

Be your own central bank.  Buy physical gold.  The European central banks have started to buy gold again (Zero Hedge article this page).  They have it at a very low cost basis and yet are buying more.  What does that tell you?

If you do not have any gold, then buy some now!

Feel the tranquility...

SheepDog-One's picture

Its the only thing that makes any sense at all, be your own bank, unhook totaly from all this and get in your own lifeboat.

Alea Iacta Est's picture

China bailout.

Stocks to soar.


Stop kicking the damn can.

qussl3's picture

For all their complaining about the FED printing, the next round of inflationary fun will be sponsored by the PBOC.

Stupid fuckers will only stop when there are food riots in Beijing.

SheepDog-One's picture

They sure do price in a lot of fantasies, such as China riding to the 'rescue' and handing over free money which even if they did just means China has bought Greece as well as the US. Slavery is apparently welcomed with open arms and quite bullish.

proptrader's picture

Could you clear something up for me? I have 3m Libor at ~25bps and the OIS at ~12bps

so the spread is somewhere ~ 13bps or so..


How come the Bberg code shows what you have above? Mine has the same as you but from the spot market, i dont see the spread at 28bps...


rubearish10's picture

"Unless something totally unprecedented appears and manages to once again delay fears of a Greek bankruptcy for another 6 months, this spread will continue making overnight funding for European, and soon US, banks, rather problematic".

Yes, of course, which will likely "once again" be the case since disaster must be avoided at all costs to the 99.9% of us.

Ancona's picture

It seems now that failure is an option.

youngandhealthy's picture

The 2yr Greece yiled is totally irrelevant...No one trades....its is a razor thin market....Why bother!

Caviar Emptor's picture

This has the the makings of a classical Greek Tragedy with Bernanke in a toga, crying at the foot of the statue of Friedman...

"Why, why aren't the magic and the trillions working anymore? How can this be???"....while the cold eyes of the statue peer down at him with irony.

The Chorus, which in this case is composed of TPTB-banksters of the world, mumbles behind him: 

"Ashes to ashes, money to the rich. The circle is now complete. You have fulfilled your role. Your mission is complete. Your destiny is now to wonder blind through the streets of Washington, bumping into marble statues that never speak"


WineSorbet's picture

Reading the ran squawk sidebar is hilarious.  It's a series of contradictions.

SheepDog-One's picture

Well, at least its good knowing theres massive pain across Wall St trading desks I hope they all get ulcers and bleed out their asses and die.

spongeBOB's picture

 XLF is up > 1% on heavy vol.

Caviar Emptor's picture

Only the small fry ever do. And my guess is they'll be pounding the pavement here in NY in increasing numbers over this summer. But the big boyz never had any skin in the game at all. They make money the old fashioned way, harvesting from the bodies after the battle, reaping fruit from the few winners left. 

bankonzhongguo's picture

Don't forget that this and the whole creeping "liquidity" story are all the whistles and bells to make the "Summer of Panic." 

By August, "something must be done" and presto QE3 is (still) born.

Its their world.  We just live in it.

Stop trading passively and start a real business in your community.

Better learn to grow some clean food, fix your car or home school your kids, because nothing is coming through that Bloomberg terminal to turn your family's life around.

slewie the pi-rat's picture

well said, banko_o.  last line got me thinking "Snakes Thru A Bloomie Terminal" which was kinda fun! 

also ++ for "creeping liquidity story"++

the EU has blown a pretty amazing bubble.  when one considers possible negative consequences of same, one wonders if one is protected from contagion.  one adjusts to this uncertainty in the face of bubblicious chaos by de-leveraging and trying to strengthen the bal sheet of one's, er, ...balance.  this sucks up liquidity like a shopVac.  last time, they had to stop marking parts of the bal sheet to market (solvency) and dispense FRNs via fly-overs (liquidity), since no one was lending to nobody, nohow, with the Libor clans especially testy about leaving any clothes on the line overnight, due to what must have been perceived as counterparty snakes just waltzing right thru those wonderful terminals.

ZeroPower's picture

 As such, the 100% widening in the US FRA-OIS over the past few days, is currently generating massive pain across Wall Street trading desks,

Love all the credit info being posted TD, but im not sure this is an accurate statement, regarding the pain that is. As we understand, credit is infinitely harder to properly "invest" in and hedge against than mere equities, so typically only the smartest of shops are involved in libor/libor and libor/ois basis swaps. To that end, ive only seen places use this swap as a hedge against bank credit quality - so not necessarily a one-directional bet on a few bps rise in either FF or the spread. Comparably, one not wanting to get long a 5yr Bank CDS, could enter into, for example, a 3x6FRA-OIS instead (with great consistency, they both move in the same direction).

My observations are probably relevant depending on which financial center one is familiar with.

gwar5's picture

Nice KWN interview from Jim Sinclair. He had some great one liners.

Jim Sinclair:

“The problem is so serious, the problem is so present time, the problem is so real that it has inherent in it the probability that the economy is not going to have a significant recovery ....."


"...People (who don't protect themselves) are going to be so significantly impacted as to make the middle-class or higher middle-class join the serf class. This is as serious as it gets."


"...This has gone so far that there is no solution that can be applied and the only practical method is to continue... until somebody else is in charge and that’s exactly what they are doing."


"Well let’s just assume for a moment that QE is in fact limited to June 30th... I would suggest to you that the stock market would peel off 4,000 points so fast you would get wind burns."

"I suggest that if anything like that (stock market crash) happened exposing the balance sheets of the financial institutions, that you would have to return to QE with a vengeance, unparalleled, unprecedented in history...."


"Bear in mind that the last time we were minus 300 we ran into the flash crash.  We have not entered into a new area of regulation that could prevent that in the future....  you’re going to get prices you won’t believe."


"You don’t need one more thing to happen... you don’t need any more degrees of problems.  You’re in a situation right now where if confidence is to be lost... the price of gold will not only go to $1,650, $3,000, $5,000, but has the possibility of going into five figures based on just what we have here and now.  That’s what you need to understand."


"If you let go of any of your (quality) gold shares, you let go of your gold, you let go of your coins, you are out of your mind.”


Caviar Emptor's picture

Right now we're all just waiting to hear the outcome of the political side of it. They're calling and meeting and wrangling with each other. But as usual the final 'deal' will get decided behind closed doors somewhere. And the spin doctors will figure out how we all need to be told

AldoHux_IV's picture

China has its own growing set of domestic issues: their own social uprisings. If they continue to play the europe's lender of last resort (next to the fed of course) the EU will be the blackhole that brings this bullshit world order finally into non-existence.

China risks much more than meaningless fiat when bailing out the EU, they risk what every aspiring super power risks: spreading themselves too thin expanding their reach while neglecting domestic issues which create disorder and eventual collapse.