Some weeks ago we presented evidence that the sovereign CDS market pales in comparison with cash notionals outstanding, and furthermore, we demonstrated that sovereign spreads have been led by cash selling, which has been followed only subsequently by CDS moves, not the other way around. The fact, however, did not stop the bashers. Today, ISDA, the International Swaps and Derivatives Association, has issued the following statement, which along the lines of our observations, refutes claims that CDS speculators are to blame for widening (but not, shockingly, tightening) in sovereign spread moves.
European Commission To Back CDS Trading Ban As Second Round Of Strikes Cripples Greece; Greek GDP Now Expected To Miss Worst Case ScenarioSubmitted by Tyler Durden on 03/10/2010 22:35 -0500
The Washington Post reports that the next "Lehman-sized" event may be just around the corner, as the European Commission is now supporting a ban on trading sovereign CDS. While we are in process of tracking down whether this is actual news or just some exaggeration based on semantics, we will caution, once again, that the consequences of a CDS trading ban will be severe and very likely result in the opposite of what the EC intends on achieving. Keep in mind that everyone expected the Lehman bankruptcy to be contained as it was at best a fringe cog in the financial system. The result was a systemic collapse as one interlinked component of the financial fabric imploded after another. The rush to unwind CDS positions ahead of a ban will be massive and have unpredictable consequences. But the biggest threat is what happens to bond prices, which once basis trades are made impossible, will be promptly unwound, leading to pervasive selling of the cash leg not by speculators but by plain vanilla mutual fund idiot money. What scapegoaters seem to forget is that the vast majority of existing sovereign CDS notional is tied into perfectly boring insurance "basis" trades, in which the bond is held in combination with associated CDS. Once there is an inability to have hedged cash sovereign exposure, the demand for European sovereign paper will plummet, achieving precisely the opposite of what the CDS ban is attempting to accomplish.
Sorry, Merkel, Papanderou et al. BaFin finds that there is no sign that CDS speculation is involved when it comes to Greek government bonds, even as the volume in cash bonds has spiked. As a reminder - selling bonds has the same effect as buying CDS. And guess what: the real Greek cash-CDS basis is negative 112 bps (for "experts" this is swap-clean basis, i.e., Greek CDS minus German CDS compared to GGB minus Bunds). This means that cash bonds are far and ahead a leading indicator, and much more dominant when it comes to determining actual price/yield levels. So does this mean that GGB sellers will now be demonized with the same ferocity as those meddling CDS traders? Hopefully, this will finally be the end of the CDS as satan's spawn topic.
While we are not sure how Betty Liu feels about Rogers' invitation to come eat some Wienerschnitzel, what is certain is that Greek PM Papandreou is not too happy with the commodities pundit right about now. When asked should Europe bail out Greece, Jim says: "No, of course not, they should let Greece go bankrupt. It would be good for the euro, it would be good for Greece, it would be good for everybody." Alas, more true words have rarely been spoken. And with every financial professional already on the same side of the boat as Rogers, politicians are now left on their own to do what they know best: i.e., the wrong thing...and over and over again, and if someone can be blamed (evil, evil CDS speculators come to mind), so much the better. Also, should anyone wish to take a brave foray into the political arena (which appears is now the best paying job in the world, incidentally, just after Goldman CDS traders, hehe) on the crest of the anti CDS bashing, now is the time. It appears quite a few have risen to the challenge.
“We must succeed at putting a stop to the speculators’ game with sovereign states. We can’t allow speculators to be the profiteers of Greece’s difficult situation. Derivatives must be curbed.” - Angela Merkel
As the Fed is ever-so-gradually shifting toward a tightening posture, many have wondered what will Bernanke's actions mean for the bond curve. With various liquidity facilities set to expire this month, and the recent discount rate hike already having been priced in, there has so far not been a muted response by the bond market, although over the past few days we have seen an odd tendency, albeit minor, for curve tightening. We say odd, because as Morgan Stanley points out, the Fed's actions, coupled with an unwillingness to actually hike rates, should be one benefiting ongoing steepening. Then again, the problem with that logic is that at this point going steep is like buying Greek CDS today: it pretty much means sloppy hundreds, with very few greater fools left over (and without the opportunity to arb a naked-short position via another nearly busted GGB auction). The silver lining is that at least the government will not go after you with an arrest warrant: after all the government wants nothing else more than a vertical yield curve. A brief analysis by MS details the argument for why steepening makes all the sense in the current environment where the long-end is looking increasingly shaky courtesy of marginal liquidity contraction, all the while risk-flaring episodes such as those in Dubai and Greece will likely keep the short-end well bid for months, if not years, to come.
PIIGS Come To Market: Greece With €5 Billion In Ten Year Notes, Spain With €4.5 Billion Five Year BondSubmitted by Tyler Durden on 03/04/2010 07:07 -0500
Greece has finally come to market with a 10 year bond, catching the very end of the offering window, through a €5 billion bond issue, which according to Petros Christodoulou-spread rumors, is nearly 3 times oversubscribed. Underwriters Barclays, HSBC, NBG, Nomura and Piraeus Bank are alleged to have collected nearly €14.5 billion in bids. We wonder how much of that is merely basis trades being fillled on the cash side. "We are very happy with the bid because the re-entry into the market is always challenging. It went very well," Petros told Dow Jones Newswires. Greece has cut price guidance on the bond from 310 bps over mid-swaps to 300 bps, with books closing at 11am GMT. Pricing is expected later today. Assuming this bond offering closes successfully, Greece will have enough money to last it for at least 30 days, joining such other illustrious countries as the United States, in living bond auction to bond auction.
An early glimpse at the detailed "Volcker Rule", which is expected to be released this afternoon, indicates that not just bank holding companies are going to be targeted by the prop trading ban. The WSJ reports that "the White House's push to limit, or in some cases ban, certain risky trading activities at financial companies also would affect companies that don't own bank subsidiaries, according to a summary of proposed legislative language prepared by the administration." This probably means that life for those pesky hedge fund scapegoatees is about to get even more unpleasant. And as for trading sovereign CDS, we suggest you novate all positions promptly.
- China's hidden debt to reach 96% of GDP, compared to the IMF's estimate of 22% (Bloomberg)
- Here come the idiots - Banks summoned to EU to discuss sovereign CDS market (Bloomberg)
- Upwardly biased ADP continues longstanding tradition of prior downward revisions (Bloomberg)
- US said to tell hedge funds to save euro records (Bloomberg, first reported on Zero Hedge)
- SEC supervisor surfed tranny porn to cope with stress [and self-loathing from working for an incompetent bureaucracy] (Dealbreaker, h/t plastic man)
- Europe's original sin (WSJ)
- Rumors of Ukraine's default to become certainty: Tymoshenko loses Ukraine vote, moves into opposition (Bloomberg)
- Greece in no rush to sell bonds, debt chief says (Bloomberg)
- Greece puts bond sale on hold as it hopes bail out will let it borrow at sub-7% (Guardian)
- Banks raise pay as U.K. efforts to cut bonuses fail (Bloomberg)
- John Crudele: Hey Washington! Economy has us very worried (Post)
- Hedge funds move to euro after Greek CDS trading is the now the "old trade" (Reuters)
- Sovereign CDS trading to be probed by EU (Bloomberg) as shorting euro is now borderline illegal
As of last night, a variety of financial firms have received subpoenas seeking information on collusion to short the euro. We are currently pursuing more information and will post once we get it. Certainly sovereign CDS traders can not be far behind (especially those who traded with a less than bullish bias over the past month) from the wrath of the Greek, Spanish and British secret services, and now - various US legal and criminal administrations, which are currently convinced that it is just speculators who are at fault for 15 years of fraudulent eurozone budgetary presentations and countless bond offerings based on fake financials, finally coming to the fore. Seriously, sell anything, and you will soon be facing the business end not of misdemeanor, but real-deal felony charges, and possibly with sprinkles of treason to boot.
Dear Mr. Bernanke, dear idiots at the SEC (to paraphrase an extremely observant Harry Markopolos), and dear everyone else who is just an empty chatterbox and a mouthpiece for other conflicted interests, who claim baselessly that it is all the CDS traders' fault that Greece is about to be flushed down the toilet. We present to you the ratio of cash to synthetic (CDS) exposure. As Bloomberg points out, the "maximum amount on the line if 10 government defaulted, $108 billion, is 0.98% of their combined $11 trillion in sovereign debt." So these less than 1% marginal players are now blamed for the end of civilization? How about blaming sellers of cash bonds? Or, here's an idea, how about actually looking at the root cause, like for example governments, who with the assistance of Goldman Sachs, have lied for a decade about the true state of their finances, and have misrepresented on sovereign prospectuses all their economic exposure for years, which was subsequently signed off by countless auditors and lawyers. The corruption goes to the very top, and the SEC idiots are now investigating CDS traders? There will be no end to the insanity and lunacy, until there is a revolution in this country, or until CNBC allows a rational and objective person to talk on its network, whichever comes first.
- The deflationist: a profile of Paul Krugman (New Yorker)
- China new village makes Chanos see Dubai times 1,000 (Bloomberg)
- Goldman cranks up p.r. engine to turn sinner into saint (Post)
- Hey recovery.gov, The "stimulus" actually raised unemployment (IBD)
- Another one jumps on the bandwagon - Nathaniel Rotschild calls for ban on sovereign CDS (Les Echos (in french), via DealBook)
- Euro worst to come as Greece hammerlocks ECB on rates (Bloomberg)
Many have wondered just what it was about the past month that has woken up the bond vigilantes from their euro zone slumber, prompting them to suddenly and aggressively punish deficit transgressors. After all, it is not like the massive deficits appeared overnight. Surely had the sovereign bond and CDS widening been more gradual the European authorities would have had no recourse to blame cash and CDS "speculators", whose actions have merely forced the market fundamentals to catch up with reality. Yet due to the sudden move, chaos is rampant, and any minute now 6 scapegoats are expected to be named, in an attempt to deflect anger away from fiscal blunders by various administration officials, whose incompetence is the primary cause for the PIIGS crisis. Morgan Stanley's explanation for the sudden and dramatic move has to do not so much with endogenous fiscal constraints, but more with the ever more prevalent opinion that the giant liquidity pump is coming to an end. Is the market merely pricing in the removal of liquidity and striking at those who will be impacted first when the tide finally starts to recede?
Paulson & Co Dec. 31 2009 13-F Released, Major Additions To Citigroup And Suntrust, Six New Names In Top 20 HoldingsSubmitted by Tyler Durden on 02/16/2010 18:14 -0500
Paulson & Co's December 31, 2009 13-F was just released. The disclosure for the fund's equity long (shorts are not disclosed, neither are credit cash nor CDS and other holdings) reveals $19.8 billion in positions. The fund's top position continues to be GLD at a value of $3.4 billion (unchanged from September 30). Notable is the addition of 206.7 million shares to the fund's Citi position which is now worth approximately $1.7 billion. Other notable financial additions include SunTrust Bank, in which Paulson added 28.8 million shares, Wells Fargo, a new 17.5 million position worth $472.3 million, JPMorgan common, in which the fund added 5 million shares to 7 million for $291 million, as well as JPM Warrants worth $250 million (a new position). Other new positions in the top 20 include Comcast (44 million share), XTO Energy (10 million shares), IMS Health (18 million shares), and Pfizer (15.6 million shares). A primary reduced holding is the fund's exposure in Bank Of America - Common stock, which declined by 8.8 million shares to 151 million, or $2.27 billion. This was offset by the purchase of 13.8 million BAC "Units" worth $205 million.