The ECB’s Monetary Policy Is Now Creating a Rush Into Derivatives

Tyler Durden's picture

Submitted by Mike Krieger of Libertyblitzkrieg

The ECB’s Monetary Policy Is Now Creating a Rush Into Derivatives

One of the most catastrophic things central banks have done in the post financial crisis period is destroy financial markets. Investors are no longer investors, they’re merely helpless rats running around the lunatic central planning maze desperately attempting to survive by front running the latest round of central bank purchases.

While actual macroeconomic and corporate fundamentals do still exert influence on financial asset prices from time to time, the far bigger driver of performance over the past several years is central bank policy. To understand just how destructive this is, recall what we learned in last month’s post, Japan’s Bond Market is One Gigantic Joke – “No One Judges Corporate Credit Risks Seriously Anymore”:

TOKYO — Fixed-income investors in Japan are increasingly assessing bonds based on their likelihood of being bought by the central bank, rather than the creditworthiness of the issuers.


Still, the fund manager desperately wanted to get hold of the bond because he bets that debt issued by Mitsui and other trading houses will be picked up by the Bank of Japan in its bond purchase program.Even if an investor buys a bond with a subzero yield, the investor could sell it to the central bank for a higher price, the thinking goes.


It goes to show that no one judges corporate credit risks seriously anymore,” said Katsuyuki Tokushima at the NLI Research Institute.

As insane as it may be, investors now acknowledge that fundamental analysis is merely an afterthought when compared to the far bigger influence of central bank buying. While this destroys free markets, fuels malinvestment bubbles and rewards cronyism, it doesn’t stop central planners — it merely emboldens them. The latest example of such hubris was on full display last month when the ECB’s Mario Draghi increased QE by a third. Here’s some of what’s happened since.

From Bloomberg:

A rush for credit exposure in Europe is manifesting in the swaps market because investors are struggling to find enough bonds to satisfy their demand.


The European Central Bank’s plan to purchase corporate bonds is fueling demand for securities in anticipation of a rally when the purchases start. Investment-grade bond funds in euros had inflows each week since the ECB said on March 10 that it would expand measures to stimulate the economy. That’s already suppressed yields and made it harder to obtain the notes, making credit derivatives more attractive.


Wagers on European credit-default swap indexes have more than doubled since the ECB’s announcement. Investors had sold a net $25 billion of protection as of March 25, near the highest since at least December 2013 and up from $11 billion as of March 4, according to Bank of America’s analysis of data from the Depository Trust & Clearing Corp.


“There’s a dearth of bonds investors can get their hands on,” said Mitch Reznick, the London-based co-head of credit at Hermes Investment Management, which oversees $33 billion. “In this liquidity vacuum, managers can use credit-default swaps as a proxy for the bonds that they can’t obtain in order to get longer in credit.”

This behavior is a lot of things, but “investing” is not one of them.

“The quickest way to go long credit is by selling contracts tied to indexes in large size,” said Roman Gaiser, who oversees 3.5 billion euros ($4 billion) of assets as the Geneva-based head of high yield at Pictet Asset Management SA. “That’s easier than buying lots of individual bonds. It’s a quick way of getting exposure to credit.”


Gaiser said he increased a long position in European credit-default swap indexes after the ECB announcement.


Though the ECB hasn’t said which bonds it plans to buy, some investors are holding onto securities they expect to be on its list, according to Rik Den Hartog, a portfolio manager at Kempen Capital Management in Amsterdam. Kempen, which oversees about $5.5 billion of credit, sold bonds and derivatives on Italian utility Enel SpA last month because the default swaps paid almost three times the spread on the notes, Den Hartog said.

So “investing” has morphed into simply front-running the decisions of unelected central planners. That’s all there is to it, and while that’s disturbing enough, there may be another unappreciated angle to this mess. When QE was rolled out by Bernanke, many of us assumed that printing money to buy bonds would be immediately devastating for the currency in question. The current state of affairs makes me question whether this assumption still works going forward.

If investors are merely looking to front run central banks, you could make an argument that QE can strengthen a currency, at least in the short run, as global fund managers move into the QE producing nation’s currency in order to front run central bank purchases.

So in the short-term, will further QE weaken a nation’s currency or strengthen it? It’s an important question to ask in this increasingly twisted world of global finance.

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Goldbugger's picture

The Great Reset will now come faster than anticipated.

Dr. Engali's picture

Been hearing that for six year now. I suppose that technically you would be correct, but I wouldn't hold my breath. These fuckers seem to have a hat with an infinite amount of rabbits.

Goldbugger's picture

Jim Sinclair predicted this in 2013 , not 6 years ago.Sinclair also wagered 1 million dollars that gold would go to 2000, nobody took that bet. Gold hit 1826 on 9/1/2011.  Not bad for a seasond professional .

"Coming out of the great leveling, which should take place sometime between 2014 and 2016, you come into the great reset. Coming out of the great leveling, which should take place sometime between 2014 and 2016, you come into the great reset. The great reset will be proposed in 2016 most likely by the BRICs themselves and turned down by Western finance. The BRICs will adopt it, the Western finance will eschew it except that four years later Western finance will adopt it"

Jim Siniclair

Hey Dr. Engali, what are your predictions on the future? Curious.

chicaboomboom's picture
chicaboomboom (not verified) Goldbugger Apr 5, 2016 10:21 PM

NEXT, money itself becomes the Problem >>

SafelyGraze's picture

helpless rats attempting to survive by front running the latest round of central bank purchases

that was a beautiful thing to say.

poster-quality thing to say.

billboard-quality thing to say.

thank you.

it's how we are able to move markets.

the ones you are trying to front-run 


CHX's picture

Fiat money (paper/digital currencies) IS (are) the problem, not real "money". Real money just is, and at some point in time will again be used as a yard stick, once the paper (PM) ponzi blows.


GoldenGoosed's picture

"My what a mess you've made.... my pretty!"

Dr. Engali's picture

Calm down Mike. I've been told by some realllly smart people that it's all going to be okay. What could possibly go wrong?

tarabel's picture



Some might argue that the Great Depression was the largest catastrophe in human history.

Yet between one day and the next, the only thing that changed was the valuations of financial assets.

The houses. the businesses, the farms and factories were all still standing on the day after the crash.

The destruction that these evil, yes--evil, men and women are boiling up in their cauldron is going to make the Great Depression look like the Dot-Com boom in comparison. No corner of the world will pass untouched.

All of you who are quicker, smarter, and better informed than me have seats reserved on the last train out of town. But I'm already gone.

Come out of her, my people.


Dr. Spin's picture

Good for you Tarabel, I checked out in '99 and have been watching from a safe distance ever since. 

...and no, I'm not sucking off some .gov or corporate pension.  I'm my own man...


yogibear's picture

We can only hope derivatives blow.

The CBers are MFers.


CHX's picture

How does one kill werewolves again ?

coast's picture

My apologies bout being off topic, and I hope the person who posted the "eagle one to wanta" reads this.  Well, I reviewed your information, and watched the trailer...But then I wrote PCR and here is his answer....just sayin..

I do not know anything about Wanta.

Reagan did not bring the Soviet Union down. Reagan negotiated with Gorbachev the end of the Cold War. The SU fell about 3 years after Reagan left office. The SU fell because hardline communists arrested President Gorbachev. It was a coup attempt to roll back the liberalization, and it resulted in the collapse of the government. p.s.   I also hear that china is going to a gold backed yuan on april 19th...think there is any truth in this?  I think zerohedge should at least put an article up so we can discuss it...
Dr. Spin's picture

That's interesting coast,

I do believe that China fully intends to become an integral part of the reserve currency if not the reserve currency itself.  When (not if) China does announce a gold backed yuan, the gig is up for the United States financial ponzi and all hell will break loose. 

I don't think China is ready yet...also, China is hoping the United States will crumble on it's own so they don't have to take any heat for hastening it's fall...


Farmer Joe in Brooklyn's picture

  "If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn't. And contrary wise, what is, it wouldn't be. And what it wouldn't be, it would. You see?” 

Lewis CarrollAlice's Adventures in Wonderland & Through the Looking-Glass

Farmer Joe in Brooklyn's picture

  "If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn't. And contrary wise, what is, it wouldn't be. And what it wouldn't be, it would. You see?” 

Lewis CarrollAlice's Adventures in Wonderland & Through the Looking-Glass

GoldenGoosed's picture

Even as a child I could not read that story. I haven't been able to watch the movie as an adult either. I guess I should experience it. Becoming a necessity.

Dragon HAwk's picture

There can be No Reality, too many Derivatives are betting against it.

CHX's picture

Meanwhile "pet rocks" are a "traditionally" real alternative.

venturen's picture

Unelected ==== Goldman Appointed

GoldenDonuts's picture

So the monetary policy is having the desired effect.  Big banks unloading their derivatives on anyone who is stupid enough to take them.

JailBanksters's picture

Great plan, fix one problem by creating another problem.

When the derivatives become a problem, they will just create another problem to replace it. When will the fun ever stop ?

Aussie Battler's picture

Draghi deserves a lead bullet for his efforts.

CHX's picture

... an Ag-coated molyb one might seem moar appropriate...

PPT Inc.'s picture
PPT Inc. (not verified) Apr 6, 2016 4:44 AM

Who is buying the swaps, locking in negative nominal yields? Guessing pension fund, of course. The banks bribe the fund managers to leaave the suckers holding the bag.

TAALR Swift's picture

When a dynamic system threatens to become unstable, moving toward high frequency components is the last thing one should do.

The safest thing would be to move toward low frequency components.

Stated clearly: it makes the most sense to move into cash and real assets, all of which should be held directly, to avoid third party risk.

If you don't hold it...

conraddobler's picture

Eh I've followed this stuff for years and it's gotten me nothing but anguish.

It's interesting in a train wreck sort of fashion and it's fascinating from the persepective of where will it all end up?   You just know it will be epic but I'm afraid even when it blows up it's a controlled demolition.

The twin towers are probably an icon for what is comming.   

They are destroying trust and fairness and equity and everything good in the world is being sold out for money.

Love of money is the root of all evil.

All these things spring from that and all are evil for this reason.   It's really the heart of human evil the fountain of it if you would.

Which means some great good is comming for those alive after all the horseshit.

When you imagine that God is in fact good and just and up there and you imagine how he must feel about now then you can imagine what is about to be unleashed upon these fuckers and we get a front row seat for allowing it all to happen.

There are ALWAYS equal and opposite reactions and this one might very well alter how we think about money for all of time.

If you imagine God as a father this is the part of the story where the dad has officially decided to let his kids so fuck up their lives it's not funny.

Then comes the whoopass can's a poppin.  

Looks like he's going to need an entire Redwood forrest for all the switches he's going to need.  It has the makings of one of those lessons they code into religious texts for thousands of years.


Theonewhoknows's picture
Theonewhoknows (not verified) Apr 6, 2016 9:31 AM

The centrally planned, central bank scheme is being implemented without any delays. Now let's congratulate Draghi and Yellen on economic illiteracy and try to hide whatever money we still have before they will try to take it for common good.