Borrowing Costs

Tyler Durden's picture

Frontrunning: June 21

  • German court may delay ESM bailout fund ratification (Reuters)
  • New dangers lurk for rudderless Spain (Reuters)
  • SEC Said to Depose SAC’s Cohen in Insider-Trading Probe (Bloomberg)
  • With Europe broke, Asia is Wall Street's new dumb money: Riskier Bets Pitched To Asia's Rising Rich (WSJ)
  • Spain expected to request bank aid after debt test (Reuters)
  • Lawmakers Push for Overhaul of IPO Process (WSJ)
  • Israel: "all options" open after Iran talks fail (Reuters)
  • Canadian housing boom to grind to a halt (Financial Post)
  • Italians Dodge Property Tax in Test for Monti’s Austerity (Bloomberg)
  • ORCL earnings must have been good: Oracle CEO Ellison to Buy Most of Hawaiian Island Lanai (Bloomberg)
Tyler Durden's picture

Sentment: Hoping And Praying Bernanke Sees His Shadow And Six More Months Of NEW QE

Everything today is all about the Fed, which at 12:30 pm will release its standard statement. The publication of Fed officials' forecasts and Chairman Bernanke's press conference will follow at 14:00 and 14:15, respectively. Some, like Goldman are convinced the Fed will announce new easing measures, which could take the form of a new LSAP, more Twist as well as a lengthening of short-term rate guidance beyond 2014, potentially going as far as announcing a Flow-based form of QE, while others such as BofA are fairly certain nothing will happen. Then at 2:00 pm the Fed will release its new economic projections, in which it is roundly expected that the Fed will revise its GDP forecasts for 2012 and 2013 lower, and unemployment - higher. Finally at 2:15 pm Bernanke will address Steve Liesman and a few other members of the fawning captured media. By then the market will be either much higher or much lower, although with about 5% of the recent market move driven entirely by pricing in of more QE, the risk is to the downside. In other words the hopium phase is over. It is now make or break for the Fed.

Tyler Durden's picture

Frontrunning: June 20

  • Prepare for Lehmans (sic) re-run, Bank official warns (Telegraph)
  • Fed Seen Extending Operation Twist While Avoiding Bond Buying (Bloomberg)
  • US Watchdog Hits at ‘Risky’ London (FT)
  • G20 Bid to Cut Cost of Euro Borrowing (FT)
  • Romney Says Rubio Being Examined as Possible Running Mate (Bloomberg)
  • Hollande Says Worth Exploring ESM Bond Buys (Reuters)
  • US Upbeat After Eurozone Debt Crisis Talks (FT)
  • BOJ Members Say Japan Could Be ‘Adversely Affected’ by Europe (Bloomberg)
  • China Steps Said to Grow Bond Market, Add Issuer Scrutiny (Bloomberg)
  • How Asia Will Fare if Europe Cracks (WSJ)
Tyler Durden's picture

As Italy Comes Begging For A Semi-Bailout, Germany Says Non-Semi Nein (Without Conditions)

Two days ago, when noting that Italy is on collision course with technical insolvency should its bonds remain at current levels for even one more week, we wrote that "As Italy Hints Of Subordination, Did Rome Just Request A "Semi" Bailout?" Of course, yesterday's big market moving rumor was just this - namely that "supposedly" Germany had agreed to provide the underfunded EFSF and non-existent ESM as ECB SMP replacement vehicles, and implicitly to launch the bailout of not only Spain but also Italy. This turned out to be patently untrue, as we expected, despite speculation having been accepted as fact by various UK newspaper and having taken Europe by a storm of false hope, leading peripheral spreads modestly tighter (and Germany naturally wider). Of course, even if Merkel were to allow the ESM/EFSF to effectively replace the ECB secondary market bond buying, which is what this is all about, nothing will be fixed, and in fact it would lead to even more subordination and more bond selling off of positions which are not held by the ECB or ESM. But that is for the market to digest in 4-6 weeks as it appears nobody still understands how the mechanics of the flawed European rescue mechanism works. In the meantime, now that Italy has tipped its hand, it has only one option: to push full bore demanding that someone, anyone out there buy its bonds. Sadly, Germany just said nein. Again.

Tyler Durden's picture

And For Today's Market Ramp Rumor Du Jour We Have...

It has been a while since the Guardian came up with a European "bailout" rumor. Time to change that. In a nutshell: Germany will somehow allow a fund, the ESM, which does not yet even exist, overturn the primary principle of the Eurozone, the no sovereign bailout clause, and use money which has not been funded, to subordinate bondholders across the entire continent (because ESM is priming) and serve as an additional secured lender in addition to the ECB... In other words, the ESM will take place of the ECB's SMP. With the only difference that the ECB can print money, while the unfunded ESM will at best rely on the murky details of repo lending. Same subordination either way, of course.

Reggie Middleton's picture

You Have Not Known Pain Until You've Tried To Limit The Borrowing Costs of Spain!!!

What the MSM is missing is that Spain's failings make this real. Spain is big enough to bring down the whole shebang, right now, and its banks cannot be salvaged with just a hundred billion or so.

Tyler Durden's picture

And Now, For The Prime Attraction: Subordination Vs Moral Hazard

We have long been concerned at the implicit and explicit subordination of both financial and sovereign bondholders in Europe by the actions of their overlords political elite in pursuit of short-term liquidity fixes to insolvency issues. As talk of the ESM coming to life in the short-term and a 'Redemption Pact' in the intermediate term - which as Goldman describes involves mutualizing a portion of each country's debt (resulting in a partial upgrade of the existing pool of Eurozone sovereign bonds) in a European Redemption Fund (ERF) and, in the process, extending debt maturities (kicking that can) onto the public sector's balance sheet. As with all these mutualization schemes, the ERF ineluctably raises the twin problems of  'moral hazard' and 'subordination', which need to be mitigated. Goldman discusses these two sides of the same coin as it notes subordination is explicit when the ESM intervenes (and also with the ECB's SMP) but a little less obvious in the ERF (though still as painful) which is, we note, perhaps more appealing to keep the masses unaware.

Tyler Durden's picture

Overnight Summary: All Must Pray For Saint Bernanke Absolution

The key headline in the overnight session was that China was willing to add a token pittance to the IMF "warchest" even as it itself is struggling to find ways to stimulate its economy. Ignore that China had demands of a complete quota overhaul that would see China nearly on par with the US in voting rights, something the US, which incidentally have exactly $0.00 to the bailout effort, would agree to. The amount that warchest has increased to is now $456 billion. It was $430 billion in April just to keep things in perspective. Hardly the Deus Ex the EURUSD is trying hard to make it appear. In the meantime, a gaping hole, as large as $350 billion has opened in Spain. And that excludes the hundreds of billions that will shortly be needed by Italy. Also out of Greece we get rumors that a government may or may not be formed. As to how long said pro-bailout government will last when over half the country voted against he memorandum, that is a different question entirely. Overall, expect a quiet session with everyone praying loudly that Bernanke will launch a new LSAP program tomorrow. If the Chairman does something far less spectacular like merely expanding Twist or raising the maturity of bonds for sale from 1-3 year to 1-4 year, the market will not be happy. Lastly, the G-20 came, ordered lots of shrimp Ceviche at the best restaurants Las Ventanas and One and Only Palmilla has to offer (charge the taxpayers of course), and conquered nothing. But issued a statement that they hope things will fix themselves all over again. In short: nothing but solid reasons for the futures to be up, up, and away.

Tyler Durden's picture

Frontrunning: June 19

  • With big conditions, China Offers $43 Billion for IMF Crisis War Chest (Reuters)... US offers $0.00
  • Mexico is not Spain: Mexican Yields Drop to Record as Spain’s Borrowing Costs Soar (Bloomberg)
  • And live from Las Ventanas al Paraiso: G-20 Leaders Focus on Banks as Spain's Woes Challenge Merkel (Bloomberg)
  • German Constitutional Court Gives Victory to Opposition in ESM Suit (WSJ)
  • EU Europe’s Leaders Urged to Resolve Crisis (FT)
  • Backing Grows for One EU Bank Supervisor (FT)
  • Greek Leaders Close to Coalition, Aim to Ease Bailout (Reuters)
  • China Economy Improves in June, Commerce Minister Chen Says (Bloomberg)
  • China Looks for Loan Boost (WSJ)
Tyler Durden's picture

Spain Sells 1 Year Bills At Record Post-Euro Yield, ING Says Spain To Need €250 Billion More; German ZEW Implodes

In a meaningless "test" of investor appetite for Spain's Thursday issuance of 2, 3 and 5 years bonds, Spain today sold €3.04 billion in 12 and 18 month bills, well inside the LTRO maturity, and completely meaningless from a risk perspective - after all even Greece is issuing Bills. Yet for some reason the market which continues to be dumber by the day, somehow took the "successful" auction as an indication that there is actual demand for standalone Spanish subordinated debt. And what a 'success' it was: €2.4 billion in 12 month Bills were sold at 5.074%, the highest since at least 2003 and possibly on record. This is more than 2% greater than the same such auction at the end of May. In other words, Spain just locked in absolutely unsustainable 1 year rates. It also sold €639 million of 18 month paper at 5.107% compared to 3.302% less than a month ago. The good news: bids to cover for the two maturities, from 1.8 and 3.2, to 2.2 and 4.4 respectively. And of course they would: Spanish banks found what little LTRO cash they had lying around and in act of total desperation tried to do a carry trade whereby 3 year paper priced at 1% is used to buy 1 year paper yielding 5%.

Tyler Durden's picture

Daily US Opening News And Market Re-Cap: June 18

Relief in the markets, after the worst case scenario from the Greek elections was averted, proved to be decidedly short-lived. Although the pro-bailout New Democracy party came in first with 129 seats (with an additional 50 seat bonus) the markets still await confirmation of an actual working coalition given a caretaker government has been in place now for approximately two months. A degree of uncertainty in regards to the demands the new coalition will place on negotiating the country's bailout terms has resulted in many investors being unwilling to get their toes wet just yet. Away from the election fever, rising Spanish yields continue to spook the market with the 10yr yield breaching the 7% level, prompting aggressive re-widening of the 10yr government bond yield spreads. The move comes at a crucial time for Spain as they look to come to market tomorrow in 12 and 18 month bills followed by three shorter dated bonds to be tapped this Thursday. Meanwhile, the FX markets have reflected the shift in sentiment with EUR/USD well off its overnight highs and the USD index firmly supported by the prevailing flight to quality bid. However, the biggest currency move of the day came in the early hours after the rupee (INR) weakened substantially following the RBI's decision to leave rates on hold, this coupled with Fitch changing the country's outlook to negative from stable has kept the currency under pressure throughout the day.

Reggie Middleton's picture

CNBC Asks, "So Why Are Spanish Bond Yields Falling?" I Ask The Better Question, "Why Are Spanish Banks Considered Solvent?"

Remember, both as my research and the past 5 yrs have made clear, counterparty induced banks runs are the most damaging and Spains banks are hit from both RE and Sovereign debt crises. Who wouldn't run from this?

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