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Some Perspective On Italian Bonds

Tyler Durden's picture




 

From Peter Tchir of TF Market Advisors

Italian Bonds

It seems like the market is enjoying the "success" of the Italian bond auctions.  Given the extreme intraday volatility we have had this week, it is hard to argue that we won't see a spike higher in stocks on this news, but the reality is that: 

  • 5 year Italy is still 100 bps wider in 1 month
  • the Italian curve is flattening 
  • 10 year Italian and Spanish bond yields are about back to where they were before the alleged ECB/China buying rumor  Greece had a very successful auction last March.  It was over subscribed, a 6.375% yield seemed good at the time, and it traded up on the break. Less than 2 months later it was at 70 

Italy may not be Greece, but its important to remember that Greece wasn't Greece just 15 months ago.  It seems like we have been talking about the problems in Greece for ages, but the reality is the market let them price a big "successful" bond deal in March of last year.  While it is important to remember that the Troika has shown great support for sovereign debt, its also important to remember the market got it horribly wrong last year.

I'm sure no one will complain about sovereign CDS today, but given the amount of outstanding CDS on Italy, I wouldn't be surprised to find that the Italian auction received strong demand from hedge funds looking to pick up some cheap bonds to cover their CDS shorts - at least temporarily cover them.  This should have impacted the 5 year more than the 15 year as it creates a quick basis package that the hedge funds know they can sell out of their long over the next week as the underwriters/primary dealers work to support the issue. 

On the other hand, the rating agency comments on the U.S. debt ceiling are just stupid, in my opinion.  If the agencies start to say that a country that has i) this much debt, ii) a debt ceiling, and iii) divisive partisan politics, shouldn't retain a AAA rating, then I would worry, but this posturing around technical default shouldn't spook the market.  I was surprised it did, but that was a quick overnight chance to cut some shorts, nothing more, in my opinion.  

 

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Thu, 07/14/2011 - 08:11 | 1455453 Thorlyx
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Why do you need a ceiling if you can raise it at will ?

Thu, 07/14/2011 - 08:22 | 1455477 bigwavedave
bigwavedave's picture

its not a debt ceiling... its a debt target.... how many readers think we wont hit the target?

Thu, 07/14/2011 - 08:44 | 1455512 Raynja
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We always hit the target, then to prove we're really badass we move the target further away and hit it again.

Thu, 07/14/2011 - 09:25 | 1455662 snowball777
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Do you mean 'hit it'...or blow past it at the speed of debt?

Thu, 07/14/2011 - 08:46 | 1455519 slaughterer
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Advice from the professionals to the rookies: 07-14 08:36: Irish finance minister says that experience tells us that if Spanish and Italian yields go to 7% this is bailout territory I do not think Italy will have a problem pulling off 7% soon.
Thu, 07/14/2011 - 12:38 | 1456490 Ghordius
Ghordius's picture

First: of course we will see 7% soon, not only in Italy.

Second: I do hope you are being sarcastic with "professional to rookies".

Third: Bailout territory? The term can't apply for big debt like Italy's (or US or Japanese, etc.)

Fourth: The past Irish Government made the mistake to bail out Anglo-Irish.

Fifth: The present Irish Government, after being elected, did nothing about it.

Thu, 07/14/2011 - 08:15 | 1455459 Mongo
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Hitler would have loved the 2100st century...

Thu, 07/14/2011 - 08:18 | 1455465 The Axe
The Axe's picture

Not wrong..but   correct     if they did not buy the offering last march..ponzi   over....(with mostly client monies)  but profits and more profits, from  the ponzi continues...so actually money well spent on Greek bonds..

Thu, 07/14/2011 - 08:18 | 1455467 chinaguy
chinaguy's picture

"Real M1 deposits in Italy have fallen at an annual rate of 7pc over the last six months, faster than during the build-up to the great recession in 2008," said Simon Ward from Henderson Global Investors....

Thu, 07/14/2011 - 08:21 | 1455475 bigwavedave
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italy is not greece.... italy WAS greece. just look at the fucking statues!

Thu, 07/14/2011 - 08:25 | 1455485 mophead
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This article starts off by saying it's "important to remember" that Greece wasn't Greece 15 months ago. Fine, but it's also important to remember that bad news = more stimulus = more inflation = higher asset values. There.

Yawn.... enjoy the rally bitchez.

Thu, 07/14/2011 - 08:51 | 1455531 ZeroPower
ZeroPower's picture

I see about $286Bn gross vs $24Bn net notional on Italy, trend clearly higher over last weeks. Most out of the Eurozone it seems too... (Greece at 78Bn and 5Bn respectively.

Thu, 07/14/2011 - 08:52 | 1455535 milanitaly
milanitaly's picture

Out of Euro immediately and leave the problems to Germany. We are going to pay more taxes for nothing or only to buy a BMW car for less.

Soon we will not have enough money to buy a FIAT.

 

Thu, 07/14/2011 - 09:05 | 1455557 Josephine29
Josephine29's picture

I agree that there are problems with declaring this a success as a twitter comment I saw points out rather well.

Todays five year bond auctions increase in yield over last month's would cost 18 billion Euros a year on the whole Italian national debt @notayesmansecon
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