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Visualizing The Death Of The European Sovereign Credit Market
Since the rumors and news of the Sovereign CDS ban began in Europe (due to officially be in place next week), sovereign CDS spreads (and their gross and net exposure) have been crushed.
Equal- and GDP-weighted European Sovereign CDS spreads have collapsed as the market has died.
This would seem like a good thing for all the standard CDS-haters and speculator-blamers who believe that Europe's problems were 'caused' by these mean credit traders; but bonds haven't followed.
Clearly, the tight relationship between CDS and bonds has broken - as CDS risk has collapsed, bonds did not follow...
We have noted many times before that sovereign CDS are nothing less than a cleaner signal than bonds (both credit and redenomination risks) and as has become very clear, the reality was far worse than even CDS had suggested - when noone believed Europe was in trouble. The problem with the CDS ban (which is implictly what has occured given the inaneness of the correlated hedge model required to prove un-nakedness) is it has notably unintended consequences.
Bonds have rallied but this is more consequence of front-running Draghi's OMT than CDS compression.
For Spain specifically, bond spreads are merely back to six month lows while CDS have collapsed to 18-month lows - massivley dislocated. Typically this would bring huge basis trade flows to notch bonds lower in risk (higher in price) but it hasn't!
[This wouldn't be the only unintended consequence of
government/central banker action - as the risk-on/risk-off nature of
markets has compressed the need to hedge idiosyncratic risk in
single-name CDS (as we noted here).]
The concern is, should we see a risk flare, the CDS market (and its basis traders) will not be there this time as a natural buffer (or protection provider) this time. Exactly as we noted here, the unintended consequence of regulating away the CDS market will be higher costs of funds as real-money will be considerably more risk averse in an unhedgeable event risk market.
We are already seeing the front-running effects of Draghi's OMT wearing off on bonds (Spanish bond spreads are over 50bps wider in the last 10 days) and with domestic banks the bulk of the holders (as we noted here), they will be left with a much more noisy balance sheet with no market to hedge their positions in.
But apart from that - great job regulators! Just like LTRO, the actions of a politically motivated group of elites has reduced any signaling from the market and concentrated risk in an ever smaller and more dangerous group of entities.
The only sizable real money in European sovereign bond markets is domestic banks - all trading flow is now fast money funds looking to pre-position for central bank actions and then sell back into them. This is the death of sovereign credit markets - as while on the surface all appears to be fine, in fact the self-referential nature of the domestic banks gorging (by necessity) on their nation's bonds is creating huge potential for event risk (as is so obviously priced in given the non-local bonds outperformance this year).
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Stop it already with the "unhedgable" shit. Nature and the laws of physics have never made any promises regarding anyone's survival. Moreover, when fraud is the status quo all bets are off (at this point it is simply gambling anyway). In this environment, possession is the law. Now, where is all the gold and oil? This is all that will matter shortly, hedge accordingly (ironic I know).
All in time young grasshoppa - 5+ years to go - masters of the universe aren't going down easily and not without a fight to the death - until then accumulate accumulate accumulate
Neither a surprise nor was it expected. Just another day at work for the master planners doing whatever it takes, law be damned, to stay in power. Wake me up when the real fireworks start. zzzzzzzzzzz.......
soon there will nothing to be rated for the "rating" agencies....their sites should be called hot or not :)
The thing that I don't get about CDS' is why anyone would buy them. It's already been so dramatically proven time and time again that the issuers have the upper hand in determining a credit event.
What's the point in buying a CDS if there will never be a 'credit event', regardless of an actual default or not?
The point is: you are donating money to the cause since they will never (be allowed to) pay out, nor capable of being paid-out. Yet another muppet ass-raping paper game.
Yea, good point. JPM & Barc come to mind. Even if there is a 'credit event', it's fucking lights out at the issuer thanks to infinite leverage.
If CDS is banned then you can only hedge the old fashion way... sell bonds.
So when volatility in the bond markets raises yields and prices inevitably drop, the holder swill be forced to sell into the open market, is that correct? And without real price discovery, vol rises again and the cycle repeats and a cascade of selling would occur?
With the ESM funding options not yet in place, who would step in to stabilise the European bond market? Germany? The fed? The IMF?
Thanks for your response in advance.
:D
the fools that pay taxes like you and i
in other words , its not a circle of hands passing on the same money but from my left hand to my right hand and back
Just like LTRO, the actions of a politically motivated group of elites has reduced any signaling from the market and concentrated risk in an ever smaller and more dangerous group of entities.
Oh, let's don't be silly. Everyone knows the whole point of CDS is to DISTRIBUTE risk with maximal efficiency. You don't have a PhD, do you?
the age of eurobonding becomes inevitable; all for one and one for all, as we plunge into Atlantis territory!
Atlantis was not a walk back into time, as the legend imagines; its a walk forward into future time!
Hey this time machine works both ways!
Those who forget the past are condemned to...I'll leave the rest to Robottrader or to MDB to fill in the blanks!
If the world oligarchy decide on the great freeze of the markets, giving the CBs unlimited mandate to kick to infinity, they will ALSO have to sterilise all supply and demand activity to rigidify BC plays so that inflation and selective monetary/financial deflation does its predefined work over time. Can you imagine the Oligarchs sitting for twenty years without someone jumping the gun and pulling the plug on rival...as since time memorial? ...That would be the first time in history! Human Nature is a bitch!
But currently in this mad world, as of today, the world of investment banking is having its nuts kicked around as we see :
1° the "execution at mignight" of Vikram PAndit of Citi, made to wear the hat of Sandy Weil's clique that took over retail banking king back in 1999. 'You do not bring in the butter anymore' is the verdict.
2° UBS lays off 10000 in the investment bank sector.
3° the US banks have deleveraged on their official books. They now have to deleverage on the shadow banking; aka the derivative and hidden bets, now all known but not paired out. Here is where Goldman and JPM have excelled in selling their products to all and sundry, and making a big margin as middle men, then betting on the CDS front against the buyers of their own concoctions the toxic MBS CDOs. This TOXIC game of playing both sides of the table is OVER....
4° EUro banks have not adjusted their books and they hold the US banks in their interconnected stranglehold, and vice-versa in US shadow banking unwind, when it comes. What an incestuous scam this is! And, moving to Basel III with 10% equity in a NO growth world is virtually impossible without debt write down....oh, the looming void!
5° So now the CBs in the face of NO prospects of sustained growth allowing write-off of accumulated debts, in an environment where the motor of world growth stays the BRIC nations, aka the creditor nations NOT the debitor nations, where the debt hole is, have to find a way of bridging that strucutral gap, through ......WHAT???
Good luck with that!
"This TOXIC game of playing both sides of the table is OVER...."
So what is the end-game, falak? How does it play out? Who wins?
its a runaway train, you may win on the betting tables of the train; before it hits the wall, but when it does...
First world loses out big time, as without growth here, its a big fight to win in those BRIC markets, as nobody will INVEST anything in dodo first world that bears fruit soon...that makes the spiral even tighter for massive deleveraging to become inevitable; painful, painful painful...only the rich and diversified will come out of this without losing their bread and butter. I'd hate to be leveraged and in debt or without work today!
End game for the financial markets is going back to the markets of the 80s before this shadow/investing banking world took off!
But they won't give up their hold without a fight so who knows where that takes us. Dangerous world.
So massive deflation as they dump assets to cover their leverage?
yup, for the banks, remember they are being asked to conform to Basel III. From 3% to 10% without much growth, and lots of dicy assets...
nope for the Cbs they will pump the fiat economy for all they're worth, with one eye on money velocity which is the signal when hyperinflation arrives.
"This would seem like a good thing for all the standard CDS-haters and speculator-blamers who believe that Europe's problems were 'caused' by these mean credit traders..."
The EZ crises was wholly caused by Europe's socialist governments (I include the likes of Merky here as she's only a German conservative in name), supported by their voting publics who mindlessly believed there really was a free lunch.
Blaming others for the collapse of their insane economic policies is what socialists always always do. And the next thing they do is call for more socialism. We see that happening with their demands for a banking union, seizing control of the markets etc etc etc. It will continue until war begins or the populations take to the streets armed with rope and piano wire...
NPR reported that " 9 judges found raincoats such that it will alllow them to hold hearings on survillance law today though rest of the east coast is closed." http://www.reuters.com/article/2012/10/26/us-usa-court-surveillance-idUSBRE89P06420121026
this post presents as in favor of CDS market? really? I mean Im not in favor of regulation, central planning either.. but the whole derivatives markets in general.. have PROVEN to be a giant fraud / graft tool....yet another incarnation of fiat..
there never is actual capital behind the promise to pay if an event actually happens.. which we now know..they wont if it ... CDS have PROVEN forever to be another bonus producing wealth extraction from thin air product for insiders...
wtf?
So what? People give banks their money. If you don't like regulation, you of all folks should know that the banks can do whatever they like with that money.
That's their FUNCTION.
Finally watched In Time this weekend. Basically: people are genetically engineered to stop aging at 25, have a clock on their wrist that sets to 1 year at the time, and they die when it gets to zero. Of course, many try to increase the time remaining to them by working, stealing time, etc...
I won't comment on the worth of the movie (everyone has different taste). There was one point in the movie when the inverse-ponzi was explained as part of the justification for "a few immortals mean that many must die". Essentially, prices and pay were controlled to the point where many worked like hamsters on a wheel to try to stay ahead but were unable to. Time was "borrowed' (made me think of MoneyMart and pawn shops) at usurious interest rates - which enhanced the treadmill experience.
Essentially, time (GDP) was earned by many on that treadmill, and siphoned off through inflation, taxes, and interest onto the wrists of the 'wealthy' who got to effectively live forever. People were kept in time ghettos by the exhorbitant tolls required to go from one area to another - effectively guaranteeing wage /debt slaves for the enrichment of the time elite. Special enforcers ensured that no one inappropriate got to accumulate a lot of time. Those who gave away time were frowned upon and literally killed if caught (all of their time was taken away).
I was struck by the incredible analog to the modern financial system and our lives.
Yeah with Justin Timberlake and Amanda Seyfreid. I saw that, too. But I won't bow to others' taste, I'll tell you:
The movie had a very interesting concept and could have been done much, much better. The production values were terrible- like TV movie standards. The acting was pretty good, especially from Timberlake, who has looked very stiff in his previous films, including Bad Teacher.
It is worth a rent for sure for some young screenwriter who can really capture the essence of the menace of literally running out of time and also fully illustrate the black market that would have surely existed at the time. It is not at all a great movie now but it could very well be in the future.
Worth a watch on a rainy day!
:D
https://www.youtube.com/watch?v=idCFV0KF4uo
Generally good article but I don't think these are unintended consequences. The central planners want to distort the price system so that it is not so obvious that they are running the economy into the ground. It's not rational, but socialism is all about the short term.
use of the socialism label trivialized your post
this is about monopolism, sir. salvery.
all the political gibberish is just a means to a end.
central planning, central governments.. are plainly about monoploy. think west virginia coal mine towns... on a global scal...
I've not seen the term "monopolism" used much in reference to government. A more common word is totalitarian ...which of course is what socialists are really after with their central planning etc.
So where does money go if not into the cds market and the real money doesn't go into the bond market, Gold Silver? I hope so. Crazy thing is that on the one hand there isn't enough money to cover a 700 trillion German CDS default or any other major CDS default of import, so now through the regulating away from CDS money is supposed to flood the bond market right? Has it, will it? What if it doesn't? This is all going to end very badly at some point.
Credit anticipates and equities confirm. Look out below!!!!
but the masters of the universe will ramp till they drop - BTFD !
And just in case you missed it, Anonymous published a whole lot of documents from the Greek Ministry of Finance over the weekend... http://www.anonpaste.me/anonpaste2/index.php?96dca2501712c2bd#7zC3Gk22bl9xGtQbWaaWEeEu46UElidVHWqL/lUNV+0=
Seems to details a whole range of swaps and payments between Greece and various banks along with a whole pile of stuff in Greek.
Masters of Universe getting flooded and blown away today. Then they get the meteor strike and finally the earthquake. Banksters stole something from God. God pissed now.
Just like LTRO, the actions of a politically motivated group of elites has reduced any signaling from the market and concentrated risk in an ever smaller and more dangerous group of entities.
Genius at work... give those clowns a Nobel, Krugmans got one, President O has one and so now does the EU.. may as well lavish every loon in the public sector with one
This is the death of sovereign credit markets..
Everything Govt touches turns to Crap ...check the history books, 100% rock solid confirmation for 3,000 years, you can't miss it unless you're a State history teacher or Nobel winner