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The Latest ECB Bond Market Manipulation Gimmick: Telegraphed OWICs Or Game Theory 101

Tyler Durden's picture




 

Despite empirical evidence that someone big stepped an and bought the bejeezus out of Italian bonds yesterday ahead of the Bill auction, and despite Willem Buiter's warning that tomorrow's critical BTP auction will fail absent ECB intervention, some of our transatlantic colleagues were panning long-winded essays that it is supremely irrational for the ECB to even think it can control the Italian bond market because of X, Y and Z. We, on the other contend, that precisely because it is supremely irrational is why the ECB will do it. And now we have evidence that if nothing else (and we will know for sure next week if the ECB bought the bonds after the weekly SMP details are released over the weekend, as else it would show that the PBOC is actively buying Italy bonds in the secondary market). And in the absence of actual buying, yoday we get another view at just how the ECB thinks it can manipulate markets. From Dow Jones: "Moody's junking Ireland is of particular concern "as many market participants have more hope for the Irish recovery story relative to Greece and Portugal," says ING rates strategist Padhraic Garvey. "Moody's have a different view." Garvey also says that the ECB asked for prices of sovereign bonds Tuesday but "there was no evidence that the ECB actually bought peripheral paper." Translation- the ECB sends out a OWIC (Offers Wanted in Competition), and dealers are supposed to soil themselves knowing full well that even if Trichet does or does not bid, other dealers may. Game theory 101.

Brilliant: so instead of actually wasting dry powder, all the ECB's market manipulation desk has to do is just spread the word that it is about to buy, buy, buy, thus creating a self-fulfilling prophecy, and a scramble by the "other" to frontrun the ECB. There is one problem with this strategy however - it will in theory work for exactly one week max as if it is confirmed that the ECB did not buy, and merely cried wolf, nobody will believe any OWICs coming out of the ECB any longer.

Simply said: this in conjunction with the Consob's move overnight, is just another sign how powerless the Eurozone is to prevent the collapse using conventional means, and now has to resort to backroom gossip and breaking the rules.

All of this is doomed to failure.

 

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Wed, 07/13/2011 - 07:27 | 1450960 ZeroPower
ZeroPower's picture

Also note how the EUR didnt move (actually, was bought pretty steadily here this am) on Ireland dgrade info. Irish bonds were dumped though.

Wed, 07/13/2011 - 07:46 | 1451001 max2205
max2205's picture

It's called Jawboning..... Boning

Wed, 07/13/2011 - 12:03 | 1451324 Urban Redneck
Urban Redneck's picture

And how is it any different than what Goldman Sachs does every time it puts out a recommendation or research note to jawbone the market to further Goldman's own interests?

Wed, 07/13/2011 - 07:28 | 1450963 Manzilla
Manzilla's picture

At least they do all this with some really cool accents.

Wed, 07/13/2011 - 07:29 | 1450965 A.W.E.S.O.M.-O 4000
A.W.E.S.O.M.-O 4000's picture

"All of this is doomed to failure."

As long as 51% of the saps on this planet believe that the FED / ECB / IMF know what they are doing we'll continue on our merry way.

Wed, 07/13/2011 - 07:29 | 1450966 oogs66
oogs66's picture

Expectations management works better when you have some ability to back it up with cash.  Merkel would probably kill Trichet if he wastes any more ECB money on foolish attempts to beat the bond markets.

Wed, 07/13/2011 - 07:39 | 1450985 Barleycorn
Barleycorn's picture

The ECB is well beyond "wasting more money".  The more that you refer to is already gone.  The ECB is technically insolvent, which, perversely enough, on the basis of you can only die once, gives them all the incentive in the world to keep throwing money at these soon to be defaulted credits...

Wed, 07/13/2011 - 07:29 | 1450967 tallen
tallen's picture

New all time high in Gold, 1579.7. (By the time your reading this its probably higher)

Wed, 07/13/2011 - 07:35 | 1450972 Quintus
Quintus's picture

Nope.  'Somebody' has prices well under control.  You think The Bernank is going to stand in front of Congress today and give his testimony while Gold is making record highs?  History would lead us to believe that's unlikely.

Wed, 07/13/2011 - 07:56 | 1451038 equity_momo
equity_momo's picture

Blythe will have orders to nail it at the afternoon fixing and then when he speaks. The remainder of the session though it will be going up. Its like trying to hold a beachball down under water.

Wed, 07/13/2011 - 07:57 | 1450978 Zero Govt
Zero Govt's picture

Not many people know this but bailouts are illegal under the EU Constitution ...front door bailouts (ie. handing Euros over to bankrupt Euro-Govts) and backdoor bailouts (ie. buying Govt debt in the secondary market to prop them up)

...someone should let the EU know before both the front and back doors of their ideological Ivory Tower come off their hinges with all the bailout crew (Eurocrat) activity rushing through in a sweaty panic for the past year 

Wed, 07/13/2011 - 08:44 | 1451178 luigi
luigi's picture

OTOH a war is seldom played by the rules, and peacetime laws are for the most part set aside...

You can't cheat the game and than call foul if the other part tries to defend itself.

Wed, 07/13/2011 - 09:52 | 1451342 Dick Darlington
Dick Darlington's picture

Exactly! Here's what is said in Article 125:

1. The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.

 

And here u can find the whole worthless piece of paper called Lisbon Treaty:

http://www.lisbon-treaty.org/wcm/the-lisbon-treaty/treaty-on-the-functioning-of-the-european-union-and-comments/part-3-union-policies-and-internal-actions/title-viii-economic-and-monetary-policy/chapter-1-economic-policy/393-article-125.html

Wed, 07/13/2011 - 08:28 | 1451052 Kokulakai
Kokulakai's picture

.

Wed, 07/13/2011 - 08:05 | 1451055 Paper CRUSHer
Paper CRUSHer's picture

del.

 

Wed, 07/13/2011 - 08:40 | 1451162 luigi
luigi's picture

Also the Rating Agencies statements usally don't work longer than a week and manipulate markets: so your point is...?

Wed, 07/13/2011 - 09:16 | 1451273 Peter K
Peter K's picture

The full faith and credit of the European Chinese Bank backs the Euro:) Get used to it.

Wed, 07/13/2011 - 09:49 | 1451364 crash_davis
crash_davis's picture

would the last person to come running out of the european theatre please turn out the lights

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