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.