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Strategic Outlook: Greece, Negative Swap Spreads, Near-Term Caution In Europe, MBS Spreads And More
The latest summary strategy deck from Morgan Stanley does a great job of capturing the key market driving themes.
1. Even with deflation everywhere, real (and nominal) rates have only one way to go: up.
2. Why Global Moral Hazard, now in Europe, has mitigated the debt rollover risk in Greece and the other PIIGS but has only made long-term solvency an even more critical issue
3. An artist's rendering of global moral hazard in CDS
4. And the chart for all you who are sick and tired of Greece. Here is why you will be hearing much, much more about this country, even as the US/IMF takes on a dominant role in Greece's future.
5. Even as Europe and Greek administration officals have claimed repeatedly that all that has been done should be sufficient for Greek bonds to trade inside of Bunds, here is the chart that shows what the market is really looking at. I.e., everyone is bypassing Europe's empty rhetoric and focusing squarely on the Herculean task before Europe's periphery.
6. Moving on to the main topic of last week: negative swap spreads. Here is what is keeping Morgan Stanley up at night, and what is likely a catalyst for 10 Years to continue creeping to MS' 5.5% target on the bond.
7. Is the swap spread merely a function of unmatched on- (UST) and off- (LIBOR) balance sheet supply:
8. Deficits -> Supply -> Swap Spreads: Higher Yields
9. Next - foreclosure mitigation: Forgive and Forget is the new Extend and Pretend. And all thanks to Taxpayer Capital, LLC. With HAMP an abysmal failure, and with BOFA already having tried principal reductions once unsuccessfully, we don't share Morgan Stanley's optimistic view on MBS
10. Lastly, Teun Draiisma chimes in on Europe. In a nutshell - tactical caution is warranted in the next 2 quarters.
11. Both MS' CVI and CMTI readings are still not at worrysome levels, but slowly getting there.
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Considering that the CDS spreads continued to rise even after an IMF rescue plan; Greece is in a world of hurt. The worst is yet to come.
Bacon Greece. Greeced PIIGS. Goinked.
http://www.youtube.com/watch?v=EcxJXtlNRSc
Ahhh. So refreshing.
You are fired
Crunch time appears imminent. Summon the PPT.
Let's see, you increase the incentives for people to default, and you will get less strategic defaults?
Perhaps that lesson will be in the future "Obamanomics" curriculum.....
Followers of the Eurozone periiphery should also be paying attention to the Irish announcement coming tomorrow.
They have the HAMP modifications plans all wrong. If anything, it increases the incentives for strategic defaulters because in order to receive aid you have to be 60-days delinquent and have more than 31% of your income going towards other debt (credit cards, anyone?).
And existing FHA loans are not eligible for this modification.
Fitch Ratings said "the mechanism through which such support would be provided in a timely fashion remains opaque, adding that the EU's avowed support doesn't "materially lessen the risks associated with the implementation of Greece's fiscal consolidation programme and requirement on the Greek government to raise substantial funds in the coming weeks as well as over the medium-term."
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