Futures Slide As Italian Banks Drag Risk Lower; Sterling Tumbles; Bond Yields Drop To New Record Lows

Tyler Durden's picture

The festering wound involving Italian banks in general and Italy's third largest bank Monte Paschi, just got worse yet again, as the bank which suddenly everyone is focused on extends yesterday’s 14% drop, and is halted in Milan trading after falling 7%, once again dragging down European bank stocks with it, and this time US equity futures are starting to notice. 

As a reminder, Matteo Renzi's helplessness at Italy's financial situation, appears to have started to boil over, when as we reported overnight, some testy words were exchanged, in which the Italian PM accused the ECB's head and former Bank of Italy governor, Mario Draghi, of not doing everything in his power to "help Italian banks." Instead it was up to the Italian government to flaunt bail-in rules once again, after La Stampa reported that the government is once again studying a capital plan for Monte Paschi that includes new convertible bonds and support from Atlante fund, the latter worth at least €3 billion even as Brussels says intervention would need to respect principle of “burden sharing” by shareholders and bondholders. As La Stampa also adds, the results of 2016 stress test, due to be published on July 29, could trigger the start of the process to inject new capital in the bank

In short, Italy is desperate to bail out a bank whose failure (or even bail in) may spark a bank run, yet neither the ECB is rushing to help it, nor Europe has given any indication it will budge.

It wasn't just Italian banks, which have become a near-daily fixture of Europe's failing system, that dragged risk lower, but also the latest surge in the Yen and another fresh all time low in DM bond yields. Indeed, the Yen headed for biggest advance in more than a week, with the USDJPY tumbling overnight, down -0.8% to 101.65, a move which started earlier in Asian session amid thin liquidity, around the time Japan’s 10-year bond auction draws record-low average yield.

And then there was sterling, which after flirting with a rebound over the past week following the Brexit vote, fell to its weakest level in 31 years against the dollar, exceeding lows reached in the aftermath of Britain’s vote to leave the European Union. Sterling sank before Bank of England Governor Mark Carney gives a press conference in London, in which he outlined more tools to contain the fallout from the U.K.’s decision to quit the bloc, among which the first indications of how he would ease stress on UK banks:

  • Bank of England’s Financial Policy Committee cuts countercyclical capital buffer for U.K. banks to zero from 0.5%, according to Financial Stability Report published Tuesday.
  • Expects buffer to stay at zero until at least June 2017
  • Says there is evidence that risks surrounding Brexit have begun to materialize
  • Says current financial stability outlook is challenging; sees period of uncertainty, adjustment

That said, Carney's "easing" remarks have pushed UK stocks to session highs and helped cut the S&P drop to only 9 points, while pushing the pound off its multi-decade lows. Yes, we have reached a singularity in which central bank easing is currency positive.

So why the latest intervention by the BOE? As Bloomberg adds, there are increasing signs that the U.K. vote is weighing on investor confidence. As reported last night, Scotland-based Standard Life Investments suspended trading in its 2.9 billion-pound ($3.8 billion) fund this week, after seeing an increase in redemption requests “as a result of uncertainty for the U.K. commercial real estate market.” Data published by YouGov Plc and the Centre for Economics and Business Research on Tuesday indicated that pessimism about the economic outlook almost doubled following the June 23 referendum. “There’s a lot of nervousness in the sterling market,” said Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt.

Pierre Mouton, of Notz, Stucki & Cie. in Geneva told Bloomberg that  “part of the weaknesses or sell-off today can be explained by some profit taking after a surprising week,” said “We have seen this morning that the PMI wasn’t that good for the euro area, and markets can react to economic figures. It might be a good opportunity at the beginning of the third quarter to lighten the positions and wait.”

A measure of U.K. business confidence dropped sharply following the referendum, a report showed on Tuesday. Across Europe, Purchasing Managers Indexes for manufacturing and service showed lackluster growth. “We have an amalgamation of small reasons to fall piling up,” said Takuya Takahashi, a Tokyo-based senior strategist at Daiwa Securities Group Inc.

Putting this all together, and we get a major drop across European markets in which all industry groups on the Stoxx Europe 600 Index declined, with insurers and banks among the biggest losers, as the market takes a second look at the Brexit aftermath and suddenly is not so sure that everything is "contained."

Brent crude dropped below $50 a barrel as nickel slid from an eight-week high, while gold and silver retreated for the first time in at least a week. The pound fell to its weakest level since 2013 against the euro and South Africa’s rand led losses among the currencies of commodity-exporting nations. Bond yields plumbed new lows from Australia to the U.S. The MSCI All-Country World Index dropped 0.4% in early trading, its first slide in more than a week. The Stoxx 600 lost 1.3%, extending its decline into a second day, while S&P 500 Index futures slid 0.6%, The U.S. market is reopening after being closed for the Independence Day holiday.

The MSCI All-Country World Index dropped 0.4 percent at 10:58 a.m. in London, its first slide in more than a week. The Stoxx 600 lost 1.3 percent, extending its decline into a second day, while S&P 500 Index futures slid 0.6 percent. The U.S. market is reopening after being closed for the Independence Day holiday. In Europe, all industry groups fell, and more than 550 companies in the Stoxx 600 declined, with commodity producers among the biggest losers. Anglo American Plc and BHP Billiton Ltd. dropped more than 2.5 percent, while precious metals miner Fresnillo Plc dropped 2.9 percent after reaching its highest price since 2013. Standard Life Plc lost 4.2 percent after its money manager unit suspended trading in its 2.9 billion-pound ($3.9 billion) U.K. Real Estate fund. Legal & General Group Plc fell 6.4 percent after Jefferies Group lowered its rating on the insurer on concern over its dividend. The MSCI Emerging Markets Index fell 1.1 percent, after climbing 6.2 percent in the past five days in the biggest rally since the period ended March 7.

Meanwhile, global bond yields continued setting new record lows: the yield on Treasury 10-year notes slid seven basis points to an unprecedented 1.3750 percent. The securities are rallying as futures indicate that the chance of the Federal Reserve raising interest rates this year has dwindled to 12 percent, down from 50 percent prior to the U.K.’s vote on EU membership. Thirty-year bond yields dropped to as low as 2.1395 percent, also a record. “This is the most obvious manifestation of the global search for yield forcing investors further out the curve,” said Damien McColough, head of fixed-income research at Westpac Banking Corp. in Sydney. “The size of the drop in the 30-year yield reflects a bit of a capitulation trade, but I am not particularly surprised.”

Germany’s 10-year bond yield was at minus 0.16 percent, approaching the minus 0.17 percent all-time low reached on June 24. The yield on the U.K.’s 10-year gilt yield slid four basis points to 0.79 percent. Australia’s 10-year yield dropped as much as nine basis points to a record 1.92 percent following the RBA meeting. Taiwan’s declined four basis points to an unprecedented 0.70 percent after the island’s central bank was said to have reduced an overnight interest rate. Japan sold 10-year debt at a yield of minus 0.24 percent, the lowest-ever rate, and the yield on its 20-year notes touched a record low of 0.03 percent.

Market Snapshot

  • S&P 500 futures down 0.6% to 2083
  • Stoxx 600 down 1.3% to 326
  • FTSE 100 up 0.1% to 6530
  • DAX down 1.5% to 9567
  • S&P GSCI Index down 1.6% to 370.5
  • MSCI Asia Pacific down 0.5% to 130
  • Nikkei 225 down 0.7% to 15669
  • Hang Seng down 1.5% to 20751
  • Shanghai Composite up 0.6% to 3006
  • S&P/ASX 200 down 1% to 5228
  • US 10-yr yield down 6bps to 1.39%
  • German 10Yr yield down 2bps to -0.16%
  • Italian 10Yr yield up 2bps to 1.27%
  • Spanish 10Yr yield up 4bps to 1.19%
  • Dollar Index down 0.07% to 95.58
  • WTI Crude futures down 2.6% to $47.71
  • Brent Futures down 2.2% to $49.01
  • Gold spot down 0.5% to $1,344
  • Silver spot down 3.4% to $19.62

Top Global Headlines

  • Carney Sees Tougher Times With Brexit as BOE Eases Bank Rules
  • Italy Said to Consider Capital Injection in Banca Monte Paschi
  • Tesla Misses Delivery Forecast Amid ‘Extreme’ Production Ramp-up
  • Billionaire Bros. Seek Repeat of Danaher’s M&A-Fueled Ascent
  • Debt Boom That Put JPMorgan on Top After Decade Gathers Pace
  • Third Ex-Citigroup Trader Wins Unfair Dismissal Lawsuit
  • Blackstone Names Ex-M&S CEO Bolland Europe Private Equity Head
  • For RBA’s Next Move on Interest Rates, Set Alarm for July 27
  • Buffett Applies to Fed to Expand Wells Fargo Holding Beyond 10%
  • Aurobindo Said to Enter Fray for $1.5 Billion Teva Portfolio
  • Wall Street Takes a Hit in Draft of Democratic Party’s Platform
  • ‘Dory’ Swims Past ‘Tarzan’ for Third Straight Box-Office Win
  • Petrobras CEO Said to See $15b 5-Year Payment in U.S. Case: Estado
  • Google, Facebook Said to Have Looked at Buying LinkedIn: Recode
  • London Banker Bonuses Set to Shrivel as Brexit Hits Dealmaking
  • Goldman Sachs Tells Asset-Management Staff to Curb Spending: FT
  • U.K. Business Expectations Fall ‘Off a Cliff’ on Brexit Vote
  • Staples Hires KPMG to Weigh Possible U.K. Unit Sale: Telegraph

Looking at regional markets, dampened demand was observed for riskier assets in Asia following the US holiday and losses seen in European stock markets. Nikkei 225 (-0.7 %) was pressured from the open by a firmer JPY, while ASX 200 (-1.0%) was dragged lower amid a decline across the commodities complex, with participants initially tentative ahead of the RBA rate decision. Chinese markets were mixed with the Hang Seng (-1.5%) conforming to the mostly downbeat tone, while Shanghai Comp (+0.6%) was resilient amid somewhat encouraging data in which Caixin Services PMI printed an 11-month high and although the Composite figure printed slightly lower than prior, it remained above the 50 benchmark level. 10yr JGBs traded lower but are off their worst levels following a 10yr auction which showed the lowest accepted price, beat estimates and better than prior.

Top Asian News

  • China Rising Yield Premium Spurs Global Funds to Boost Holdings: Gap with 10-year U.S yield widest since August
  • Real Yield at 2014 Low as India Sells Debt Quotas to Foreigners: Consumer prices rose in May at fastest pace in 21 months
  • Japan Top-Performing Fund Fell 25% as Volatility Rose on Brexit: Stratton’s Japan Synthetic Warrant Fund fell 50% YTD
  • As 2-and-20 Fees Under Fire, Asia Hedge Funds Seek Cost Cuts: Bigger funds are joining “platforms” as costs rise, fees fall
  • Aussie Election Hangs in Balance as Slow Vote Count Proceeds: Prime Minister Turnbull’s coalition still short of majority

In Europe, equities have been equally volatile today, with all major European indices trading in negative territory (Euro Stoxx: -1.5%), and attention given to the yoyo-ing Italian financial sector as well as yet another German automaker scandal. Italian financials saw downside initially, before moving higher shortly after the open, however with Banca Monte dei Paschi (-9%) still one of the worst performers despite source reports suggesting that Italy could be considering capital injections in the Co. German Automakers also unperformed today after the likes of Daimler, Volkswagen and BMW have all been implicated in alleged collusion with regards to steel prices. Given the price action across other asset classes, fixed income has been comparatively quiet, with Bunds higher by around 30 ticks by mid¬morning, however failing to break 167.50, while the US 10-year reached fresh record lows.

Top European News

  • Pound Tumbles to 31-Yr Low as Selloff Resumes Before Carney: Sterling sank to lowest since 2013 vs euro ahead of BOE Governor Mark Carney’s press conference, where he may outline more tools to contain Brexit fallout.
  • U.K. Economy May Face Contraction as Brexit Bites: Former deputy BOE governor John Gieve said on Bloomberg TV: “I am expecting quite a sharp reduction in investment spending, a sharp hit to the commercial property market, probably a check to consumer spending, all of which could push us toward zero or below growth this year and the beginning of next”
  • Italy Said to Consider Capital Injection in Monte Paschi: Italy would seek to use Article 32 of EU’s bank failure rules that allows temporary state aid.
  • Hutchison, VimpelCom Said in Exclusive Sale Talks With Iliad: Iliad emerged as favored buyer of wireless assets in Italy that would be used to create fourth carrier in that country.
  • Mediaset Mulling New Channels, Extra Payout After Unit Sale: Co. considering starting free-to-air television channels in France, Germany, U.K. as it reviews investment options.

In FX, the pound fell to its lowest in more than three decades against the dollar, surpassing levels immediately after the referendum. An index published by YouGov Plc and the Centre for Economics and Business Research indicated pessimism about the economic outlook almost doubled in the week following the June 23 vote. Sterling slid 1.1 percent to $1.3148 and was 1 percent weaker at 84.73 pence per euro. The yen climbed 0.9 percent to 101.66 per dollar. The currency has gained more than 4 percent since the U.K. referendum amid persistent demand for haven assets. The Bloomberg Dollar Spot Index rose 0.2 percent. Australia’s dollar fell 0.5 percent, after climbing 1.2 percent over the last two sessions. A national election over the weekend failed to produce a clear winner with officials continuing to tally votes on Tuesday. The MSCI Emerging Markets Currency Index retreated 0.5 percent. It was little changed on Monday after jumping 2 percent in the four days through Friday.

“Markets are concerned about what’s going on in the U.K. and there’s more uncertainty about Italian banks,” said Vishnu Varathan, a senior economist at Mizuho Bank Ltd.

In commodities, precious metals declined as the dollar snapped five days of losses. Silver tumbled 2.9 percent to $19.73 an ounce, ending its biggest two-day advance since 2011. Gold fell 0.4 percent to $1,345.63 an ounce. Industrial metals also declined, led by a 1.2 percent loss in Copper to $4,836 a metric ton. Oil extended losses, with West Texas Intermediate crude dropping to $47.71 a barrel, a decline of 2.6 percent relative to Friday’s close following the July 4 public holiday. Brent fell 2.1 percent to $49.03.

On today's calendar, in the US we get factory orders data for May (expected to print at -0.8% mom reflecting the weak durable goods data) and the IBD/TIPP economic optimism reading for July due. Final revisions to May durable and capital goods orders data will also be released. Away from the data, this morning BoE Governor Mark Carney will publish the BoE financial stability report and this will be closely followed up by a press conference at 11am BST which will be worth watching closely

* * *

Bulletin Headline Summary from RanSquawk and Bloomberg

  • European equities trade lower across the board as risk aversion persists with Italian banking names and German auto names further souring sentiment
  • GBP/USD hit a fresh 31-year low as the post-Brexit fallout continues to grip FX markets and UK Services PMI falls short of expectations (albeit from a partly out-of-date report)
  • Looking ahead, highlights include US IBD/TIPP Economic Optimism, Factory Orders & Durable Goods, GDT Auction and a host of central bank speakers
  • Treasuries rally with 10Y and 30Y hitting record lows as risk-off sentiment sends global equities and commodities lower; this week will feature nonfarm payrolls on Friday and FOMC minutes Wednesday.
  • Italy is considering injecting fresh capital into Banca Monte dei Paschi di Siena SpA to boost the finances of Italy’s third-biggest bank ahead of stress test results
  • It’s now a familiar refrain: A European prime minister calls a referendum, his job could be on the line and markets are getting worried. This time it’s not Britain’s David Cameron but Italy’s Matteo Renzi has called a vote, expected in October
  • The Bank of England cut its capital requirements for U.K. banks and pledged to implement any other measures needed to shore up financial stability after Britain’s shock decision to leave the European Union
  • BOE’s Carney said bank will take whatever action is necessary to support U.K. but its actions cannot fully offset Brexit volatility
  • Confidence of British executives plunged and pessimism doubled as the Brexit turmoil stoked concerns that business investment and the property market are poised to slump
  • Commercial-property companies slumped after Standard Life Investments suspended trading in its 2.9 billion-pound ($3.9 billion) U.K. Real Estate fund on Monday as redemptions surged in the wake of Britain’s vote to leave the European Union
  • The pound fell to its weakest level in three decades against the dollar, exceeding lows reached in the aftermath of Britain’s vote to leave the European Union
  • The euro-area economy continued growing at a lackluster pace in June, ahead of the U.K.’s referendum on its European Union membership. Purchasing Managers Index for manufacturing and service activity was unchanged at 53.1
  • The Australian dollar erased losses after the central bank left its benchmark cash rate unchanged at a policy meeting on Tuesday. The Aussie rose by as much as 0.1% after the decision
  • Four banks including ING Groep NV and ABN Amro Group NV agreed to pay hundreds of millions of euros to settle a long-running dispute with Dutch businesses over interest- rate swaps that backfired after the 2008 financial crisis
  • Oil prices won’t rise much further over the next year and a half as demand growth slows and refiners comfortably meet gasoline consumption, according to the world’s largest independent oil-trading house

* * *

US Event Calendar

  • 9:45am: ISM New York, June (prior 37.2)
  • 10am: IBD/TIPP Economic Optimism, July, est. 48.3 (prior 48.2)
  • 10am: Factory Orders, May, est. -0.8% (prior 1.9%)
    • Factory Orders Ex Trans, May (prior 0.5%)
    • Durable Goods Orders, May F, est,. -2.2% (prior -2.2%)
    • Durables Ex Trans, May F, est. 0.3% (prior -0.3%)
    • Cap Goods Orders Non-defense Ex Air, May F (prior -0.7%)
    • Cap Goods Ship Non-defense Ex Air, May F (prior -0.5%)
  • 2:30pm: Fed’s Dudley speaks in Binghamton, N.Y.

* * *

DB's Jim Reid concludes the overnight wrap

One theme which could instead dictate near term direction for markets however and which arguably Brexit has reignited and brought back to the forefront is the ailing and fragile state of the Italian banking sector. Indeed following on from the weekend headlines concerning Italy PM Renzi and the suggestion that he is prepared to go against EU bail-in principles by using public funds to bail out domestic banks, yesterday the sector was put under further stress after Banca Monte dei Paschi revealed that it had received a notice from the ECB requiring it to meet certain non-performing loan requirements. Indeed the draft statement laid out NPL targets for the next three years which would require Monte to shed bad loans by just over €14bn by 2018.

That sent Monte shares down 14% yesterday with the rest of the Italian bank complex also sent tumbling (Banco Popolare SC -4.50%, Mediobanca -4.21%, Unicredit -3.63%, UBI -3.05%). Monte shares - which are at an all time low - are now down over 70% year-to-date already while yesterday’s move took the bank’s market cap below €1bn. With the sector sitting on a €360bn behemoth of bad loans the results of the EU bank stress tests on the 29th July loom large and it’s hard not to picture this Italian job as an important event for markets. Don’t forget that we’ve also got the not-so-small matter of the senate reform referendum in October. On a similar topic, interestingly a poll run by Ipsos for Corriere della Sera yesterday showed 46% of Italian voters are in favour of remaining in the EU versus 28% in favour of leaving. That leaves a relatively sizeable 26% undecided or unwilling to vote.

Meanwhile the daily soap opera that is UK politics rolls on with the news yesterday that UKIP leader Nigel Farage has become the latest political leader to stand down after arguing that he had achieved his political ambition following the referendum result. Today the first rounds of voting for the Conservative leadership position commence with MP’s voting to take the five candidate race down to four. Further voting is set to come on Thursday and then again on Tuesday when we will be down to the final two candidates. However we’ll still have to wait until September until we know the result of the final vote and therefore the subsequent position on renegotiation and Article 50.

In terms of markets yesterday, with the US on holiday and so volumes much lower than usual that weakness for Italian banks was enough to see risk assets finally succumb to losses in Europe following the strong run since last Monday. The Stoxx 600 ended -0.74% by the closing bell and the FTSE 100 was -0.84%. Sterling was up a fairly modest +0.15% to $1.329. Unsurprisingly the FTSE MIB (-1.74%) and Euro Stoxx Banks (-1.52%) indices underperformed. BTP’s were also underperformers in sovereign bond markets with yields a couple of basis points higher. Moves for credit markets were highlighted by weakness in financials. The iTraxx Main and Crossover indices were little changed however senior and sub financials materially underperformed after closing 6bps and 16bps wider respectively.

Some of the more notable price action yesterday came in the commodity complex and specifically precious metals. Silver in particular extended its post Brexit rally after rising another +2.86% yesterday and at one stage rising above $21/oz for the first time since July 2014. Gold closed up +0.70% meaning it is now up nearly 8% since pre-Brexit. Silver is up a fairly remarkable +19% in the same time frame.
Refreshing our screens now, with the exception of China most major bourses are lower in early trading in Asia this morning. The Nikkei (-0.78%), Hang Seng (-0.81%), Kospi (-0.35%) and ASX (-0.89%) are all in the red as we type, however the Shanghai Comp is +0.40%. That perhaps reflects the latest Caixin services reading for June in China which rose 1.5pts to 52.7 and to the highest level since July last year. Combined with the soft manufacturing reading from last week however the composite reading nudged down 0.2pts to 50.3. Meanwhile the Aussie Dollar (-0.27%) is a touch weaker this morning following the latest trade data which revealed a widening in the deficit. The RBA cash target rate decision is due shortly after we go to print (no change expected). US equity index futures are modestly in the red.

In terms of the rest of the newsflow, yesterday saw the ECB release their latest CSPP holdings data which showed the Bank as continuing its strong run rate of purchases and so far surprising on the upside. Total purchases settled by July 1st were €6.798bn. This implies that the latest weekly purchases amount to €1.9bn and an average daily run rate in that week of €380m. The average daily run rate since the program started is €425m. Interestingly we also got a breakdown of purchases by primary and secondary markets and it showed that 96% of purchases were made in the secondary and only 4% in the former, so perhaps making the quantum of buying even more impressive given the low amount of new issue buying.

There wasn’t much in the way of economic data for us to highlight yesterday. Of the data that was released, Euro area PPI printed at +0.6% mom for May which was higher than expected (+0.3% mom) and has had the effect of slowing the rate of deflation to -3.9% yoy from -4.4%. The other release was the July Sentix investor confidence reading which printed at a below market +1.7 for the headline (vs. +5.0 expected) and down 8.2pts from June. That was the lowest print since January last year and a first bit of evidence of the impact of the Brexit vote. The expectations component reading actually tumbled to -2.0 from +10.0.

Looking at the day ahead, this morning in Europe we’ve got a much busier calendar to get through with the final June services and composite PMI’s due out for the Euro area, Germany and France. We’ll also get the readings for the UK and the periphery. Euro area retail sales data for May follows this shortly after. Over in the US this afternoon we’ve got factory orders data for May (expected to print at -0.8% mom reflecting the weak durable goods data) and the IBD/TIPP economic optimism reading for July due. Final revisions to May durable and capital goods orders data will also be released. Away from the data, this morning BoE Governor Mark Carney will publish the BoE financial stability report and this will be closely followed up by a press conference at 11am BST which will be worth watching closely. Prior to this the EU’s Juncker is due to address EU Parliament (at 8am BST) on the conclusions of the Heads of State and Government meeting last month. Over at the Fed the NY Fed President Dudley is due participate in a panel discussion at 7.30pm BST. Finally the aforementioned first round Conservative Party leadership election in the UK kicks off today.

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css1971's picture

The UK property bubble has been looking for a pin for years, if not decades.

31.103gr's picture

Silver is getting clobbered today. All is well.

BTW: The vetting process of ZH is way better than .gov! Took a week for my sign up to get approved.

Haus-Targaryen's picture

There is a vetting process now? Cool deal Tylers.

I'll help out if you need an extra set of eyes on this.

Here2Go's picture
Here2Go (not verified) 31.103gr Jul 5, 2016 6:12 AM

^^Silver is getting clobbered today^^ = Maxwell Edison, majoring in medicine.


"BTW: The vetting process of ZH is way better than .gov! Took a week for my sign up to get approved."

Just be glad that they didn't make you stand outside the house in the rain like Robert Paulson. (or solve a math question)

new game's picture

eat your fiat (pudding) and dumby the fuck up...

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) 31.103gr Jul 5, 2016 7:20 AM

Silver is still very tied to manufacturing I believe so while there is some demand for it as a currency its main demand comes from its use in various forms of production.  I think Gold is a better trade if you are looking for currency hedging since its mainly used as a currency safety net.  

Atomizer's picture

Italy :

Begin the process of exiting the European Union. Negotiate your own trade deals. Watch prosperity develop. 

walküre's picture

Italy is fully vested in the propaganda efforts to building EU support (read German support) for its failing public and private finances.

Italians are taking money out by the truck loads and depositing in Zurich and London.

Germany is being asked ever so politely to hold the fucking bag for Italy.


Haus-Targaryen's picture

You and I are going to pay for everything, due to some phantom "historical moral obligation."

At least so I'm told. Apparently in order to be good German taxpayers ... We should like and want to get fucked in the ass, because "WWII" or "6 million Jews" or something along these lines.

Bend over, grab your ankles and cough.

Citizen_x's picture

You Squareheads are good at holding the bag.

Y'all get your gold back ?

The dirty Dutch did...

phaesed's picture

Those Treasuries just won't stop and with this turmoil, it may be a minute before the money stops being scared.

Lost in translation's picture

Can somebody please school me on government bonds?

1. If yields are falling, doesn't that mean demand for bonds is strong?

2. If yields are rising, doesn't that mean investor demand for that particular bond is falling? As in, investors are losing confidence/trust in the government selling the bond?

3. Are bond yields synonymous with bond rates?

I am confused. Trying to figure out what bonds should be doing when investors trust them vs. when they don't trust them...

Haus-Targaryen's picture

Correct. If bond yields are falling then there is high demand for them. However when making investment decisions -- return is only part of the equation. The other side is risk.

When you have investors buying bonds at negative yields then what they are saying is they are willing to pay for lesser risk than say investing in stocks or real estate.

When yields are collapsing across the board ... It is the institutional money chasing low risk as opposed to roi. The question is ... If the economy is so damn good as our fearless leaders tell us constantly ... Why is institutional cash running into risk-off assets so much they are willing to pay to park their cash in "safe" locations.

Lost in translation's picture

Interesting. Thank you very much for your informative reply.

To follow up, I thought rising bond yields reflect correlating risk. That is to say, the higher the yield goes, the riskier that particular bond, is.

Am I off-base/wrong in this understanding?

Lastly, if I understand you, buyers of low yield and/or negative yield bonds are doing so for perceived safety.

Would I be wrong to assume from this that it means they believe holding cash is riskier than holding bonds offering negative return? Put another way, that it's better to hold a negative-return bond if a fiat crisis is imminent?

(Maybe that last question is a stretch, on my part...)

Haus-Targaryen's picture

In a sane world higher bond yields mean higher risk.

Right now this is only partially correct.

Take July 2012 as an example. Italy was yielding north of 700 bps (that means 7% as a bip in this context means 0.01%) and Spain was north of 800 bips. What this meant is the market thought the risk of lending money to the Italian government justified a yield north of 700 bps and Spain 800 bps. This was due to their insolvent banks; shit economy; horribly unemployment; Amount of debt sovereigns were already carrying.

The problem was that Spain and Italy could not survive paying this kind of money to borrow money -- especially when debt/gdp was rising every year. Should one of those nations default (e.g., be unable to rollover debt) they would have wiped out the euro as a currency union due to reasons I cannot elaborate on while I am on my phone.

So the EFSF, ESM and ECB stepped and started purchasing debt (increasing demand driving down yields) to allow these governments to maintain their solvency.

The problem is these yields will only stay low as long as this purchase process continues. When there isn't some rainbow land institution suppressing equilibrium price of debt by creating fake demand these yields will spike and it's game over for the world financial system and we either; 1) have a depression comparable to the Ukie depression in the 1920s; 2) Weimar Germany; or a combination of the two.

So to answer your question bond yields should represent risk in a market without state interference. Right now the yield is not a product of the markets but of easy money and these yields do not reflect market reality; rather the political will to keep Rainbowland in one piece.

Lost in translation's picture

I see. It makes sense now, I think I get it.

Once again my sincere thanks for taking the time to reply, and for the world-class education on this subject. It is very gratefully appreciated!


Arnold's picture

From "in full Faith and Trust",

to "In full Faith and Credit".

sampaine's picture

Holding cash is risky if you believe the banks are insolvent (most are). If you have $100 million and you want to protect your principal, you can't just stick it in a bank.

Lost in translation's picture

Understood and agree, thanks for taking time to reply to my question(s)!

*Addendum: forgot to ask - instead of buying bonds, why don't they buy physical gold?

new game's picture

billions leaving japan and china finding new homes, HeHe, treasuries and structures. lol.

and maybe now an euro flight to world reserve currency. and how fucked up is all this? insanity, yes fucking nuts.

but a glimpse at gold and silver will reveal all is not insane...

Arnold's picture

If only we had the moral imperative to protect that capital / capitol flow, rather than steal it,

Things would be all good.

29.5 hours's picture


You are the only one confused. Cheer up, now they can make valuable securities from non-performing loans...


Europe's Asset-Backed Bond Market Is Growing More Mysterious

"While many retained deals are destined for use as collateral at the European Central Bank's liquidity programs, securitization of whole loan portfolios including non-performing loans, is a source of growth for retained deals, according to Bank of America."

Kagemusho's picture

And here on the home front, EBTs are once more delayed, with rumors flying thick and fast as to the reasons. http://downdetector.com/status/snap-ebt/news/57141-problems-at-snap-ebt

As the old saying goes, "Once is an accident, twice is a coincidence, three times is a conspiracy." A lot of people on EBT have skipped the second step and are considering the third as reflecting reality. How long before the explosion?


When The Music Stops – How America’s Cities May Explode In Violence  http://www.theprepperjournal.com/2013/09/05/music-stops-americas-cities-...
nmewn's picture

The Keynesian Response...

Print Moar And Hand It To Them At Sub Zero Percent!!!

They're like trained seals barking in this world wide financial circus.

dark fiber's picture

Sort of unrelated but Hungary has just declared a referendum on October 2 regarding EU immigration policy. In short EU is screwed and Italy is just another symptom.

Stu Elsample's picture

EU...a test run for a single gubment NWO ... is a huge FAIL!

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) dark fiber Jul 5, 2016 7:27 AM

It could be a positive if the people vote that they like the increase in migrants.

Dragon HAwk's picture

Italy and Britain leaving the EU is like loosing the Ponderosa in a Poker game, and then thinking you will get rich at the Next Table..

TradingIsLifeBrah's picture
TradingIsLifeBrah (not verified) Jul 5, 2016 7:17 AM

I thought Silver was over $20? What happened?

RawPawg's picture

we gonna need  some more July 4th hoildays,apparently

Phillyguy's picture

Italian banks are the proverbial tip of the iceberg. As pointed out by ZH yesterday- Deutsche Bank is “where Lehman was in August 2008”. Link: www.zerohedge.com/news/2016-07-04/meanwhile-most-systemically-dangerous-bank-world

Leman recap- Link: www.nytimes.com/2014/09/30/business/revisiting-the-lehman-brothers-bailo...

When this starts to unwind, things are likely to get ugly very fast. Fasten your seatbelt.