The pop media is reporting that Italian yields are falling relative to the last auction, but they are failing to mention that the relative yields on Italian debt as compared to the German Bund are already rising despite the ECB intervening and buying up Italian debt in the secondary markets in order to support its price. Historically, the ECB has failed to support bond prices of all indebted EU nations it has tried to save since the beginning of the malaise. As I commented yesterday in Did You Know That The Upcoming Italian Auction Can Spark Contagion That Touches US Banks:
When the central bank began its bond program on May 10, 2010 -- buying 16.5 billion euros ofgovernment securities in a bid to support the Greek market -- Greece’s 10-year bond yields fell more than 4.5 percentage points to 7.77 percent. Ten weeks later, as the ECB’s spending dwindled to 176 million euros, Greek bond yields climbed to 10.43 percent. They reached as much as 18.18 percent today.
The bond-buying program didn't provide enough support to prevent Ireland and Portugal following Greece in requesting financial aid. Ireland’s 10-year yields fell to 4.72 percent on May 10, 2010, the day the ECB began buying, from 5.86 percent the previous trading day. They had climbed to 8.9 percent by Nov. 11, the week before the nation requested aid.
Portugal requested a bailout on April 6 this year as its 10-year yields surpassed 8 percent even after the ECB had spent 77 billion euros on government debt. Its yields climbed to a record 13.44 percent on July 11 as the central bank took a five-month pause from bond buying.
“The risk is that the ECB stays out of the market, yield spreads widen significantly and then trading out of Italy is a challenge,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “There’s a decent risk that investors will have to buckle up for a yield increase above 6 percent.”
Here's the take from BoomBustBlog trader Eurocalypse:
"Your piece on Italian auctions is right on spot. The auction apparently went poorly (10Y @ 5.22% from 5% "ecb" levels), not surprising at all. We know already the scenario with Greece Ireland and Portugal, and this time it will happen even faster as every trader already knows what happened to those other countries.
We had the warning shot in when Italian bond broke 5% and traded quickly above 6% in july.
As I wrote before, Volatility in Italian bond and thus VAR went through the roof, 5 or 10 timest the previous levels. thus any trader in a bank or any portfolio manager has to cut losses and can't take any positions (or 5 or 10 times smaller than before if theyre stupid enough to go long). The only demand in the auction is from some passive domestic buyers, yet certainly not enough because that supply used to be balanced with non-domestic buyers, and perhaps some light profit taking from the few shorts willing to take off chips here.
The lack of auctions during summer could buy some time but the truth is out there and should be clear for anyone. The market will trade poorly and will be wary of ECB activity but we can only drift higher because of that supply until the bid totally dies off and its game over. It's only a matter of a few auctions from here. At some stage, the stock market, especially financials will notice.
I don't want to make any bearish bets in EURUSD on the back of that though. It wasn't a good idea in 2011. I keep the neutral stance developed before. The only solution would be for ECB to buy 10x more PIIGS debt than they do currently, but thats very, very unlikely to happen given how Germans see things today. As things get worse, as in Greece, we might start to see bank runs on Italian and Spanish names. that would really spell the endgame of the euro. thats the thing to watch"
Remember, we have identified one of the large American banks most susceptible to an Italian bond failure - by way of contagion through the French bank we identified as most susceptible to a major bank run
I have included a quick update for those subscribers who have been following and/or have a position in/against our bank run candidate, to be downloaded here: French Bank Run Forensic Thoughts - Addendum and Update. Those who don'tsubscribecan get an idea of what we are doing by downloading the French Bank Run Forensic Thoughts - pubic preview for Blog.
Here are a few screen shots from the free public abridged version of our professional level document, that easily demonstrates the problem with the French banks cannot be solved by banning short selling or buying profligate state bonds. The problem is inherent in the banks themselves. Please click to enlarge to printer quality...
Subscribersare urged to download and reread Actionable Note on US Bank/French Bank Run Contagion after reading:
French Bank Run Forensic Thoughts - Retail Valuation Note
Bank Run Liquidity Candidate Forensic Opinion (the extensive professional note version of the document above)
The Contagion Prone US Bank Forensic Review - Retail
The Contagion Prone US Bank Forensic Review - Professional
In the meantime here are some other interesting tidbits found in European news...
Finland’s Collateral Demand Leaves EU Faced With Rewarding Bailout Fatigue 30 Aug 2011: Finland' s demand for collateral on new Greek loans leaves European leaders... referring to Finland's agreement with Greece for protection. Collateral accords would be'' fatal...
The nerve of those damn Finn's. Can you believe they actually have the balls to demand (not plead, mind you, but actually "demand") collateral for a loan to a profligate state with a history of lying about its finances and not paying its loans back in full. The nerve of those people. Luckily, we have have Germany to set them straight and force them to use politics instead of math when making financial decisions that may hamper taxpayer and country...
Germany’s Hoyer Tells Finns to ‘Not Rock the Boat’ on Euro 29 Aug 2011: German Deputy Foreign Minister Werner Hoyer warned euro-area countries not to destabilize the currency after Finland ... The euro is'' of utmost importance to all of us in Europe, in particular for countries like Finland ... Hoyer was speaking after euro-area countries including Austria criticized the bilateral deal on collateral, unveiled on Aug. 16, struck by Finland ..