This page has been archived and commenting is disabled.
ECB Buying As 450bps ITA Spread Becomes New Maginot Line
As we detailed 11 months ago, LCH.Clearnet now stands at the fulcrum of today's price action in Europe as the critical 450bps spread to Bunds on European sovereign debt - which will trigger considerable rises in margin requirements - is being aggressively defended thanks to the ECB's SMP. What is evident (and troublesome) is the confluence of the rally in Bunds (as Greece implodes) and unhedgeable risks in ITA bonds which means relatively aggressive buying in ITA bonds is doing little to improve spreads.
and more critically the price change in BTPs is extreme as the ECB gets desperate:
It seems all eyes are now on the spread (which stood at a measly +150bps when the LCH.Clearnet margin rules were set) as opposed to price and so buying Bunds is perhaps the easiest and most liquid way to put pressure on the Italian bond market.
...
As a reminder, here is why 450 bps in the XXX-Bund spread is so critical, from many months ago, when Ireland was in the place where Italy is now. As Goldman said, via Zero Hedge:
The Irish case: margin requirement increased when the spread exceeded 450 bp threshold
In November, LCH increased the margin level on Irish sovereign bond
repos (from the original level of 1-3%) in 3 stages, which we outline
below:
- November 10: increased margin requirement for Irish sovereign bond REPO by 15%;
- November 17: an incremental 15% increase, citing a spread “consistently over 500 bp”;
- November 25: an incremental increase of 15%.
Thus, the current total margin requirement stands at around 46%-48%, depending on the maturity. This is taken from both parties involved in a REPO transaction (i.e. LCH is nearly 100% covered by margins in the event of Irish default, even excluding proceeds from sale of the collateral).
Potential implications for other markets
While the LCH does not state any specific rule or guideline for margins definition, general comments can serve as an indication of what could materialize in similar instances:
- 450 bp spread over benchmark a key level. LCH’s Risk Management Framework states that “we would generally consider a spread of 450 basis points over the 10-year AAA benchmark to be indicative of additional sovereign risk and LCH may materially increase the margin required for positions in that issuer”.
- Definitional flexibility remains, as the AAA benchmark is not specifically defined; it is highlighted that CDS levels, credit ratings and discretion are applied during the process.
The above suggests that current widening of sovereign bond spreads, were it to continue, could trigger additional margin requirements at central clearing houses. The focus now is clearly on Portugal, Spain and Italy.
- Portuguese 10-year bond yields are currently at around 7.0% or 410 bp above German Bund, just 40 bp shy of the potential “450 bp trigger level”.
- Both Spain and Italy, however, still maintain a reasonable buffer to the trigger level, with Spanish 10-year yield at 5.4% (190 bp below the trigger level) and Italian at 4.6% (270 bp).
...
Funny to think that 11 months ago Portugal was better than where Italy is today...
»
- 9465 reads
- Printer-friendly version
- Send to friend
- advertisements -
Maginot?
Go Around!!
The true Maginot line for Italian Debt -> French Banks
"remember to keep the right flank strong"
All of the negotiations that have been conducted until now, that have seemingly been about Greece, can be viewed as a time buying event by France, Germany and other interested parties. The extended and continuous negotiations have given all those who can get out of their positions in Euros and banks time to do so with not too much consequence. In the end, there will be a disorderly Greek default.
Don't worry, Dexia will defend the financial northern flank.
ECB buying, BOC not buying though.
Good thing Italy is on Holiday today.....
Aren't they MF Global bag holder
I thought they were the bag.
Big ECB buying cominb in to save the day.
Well, we all know what the Maginot Line did for France.
...forced the Germans to go trough "impassable" woods? To bypass it?
to be fair, the Maginot Line was unfinished - blame Belgian and British sensibilities
Uhhh..they also forgot that people were able to "fly" over it too.
And roll over it with heavily armored tanks that were fast.
And that it was built by the French, and the guns couldn't turn around.
Ehh. After they'd already driven through the ardennes to the channel the Germans tried to punch through the Maginot line just to satisfy their curiosity and did so easily.
Nyet, the Maginot line performed admirably when the Germans advanced against it.... At some point it no longer mattered...
Edit: Read up on the German Operation Tiger in 1940....you can start here http://efour4ever.com/44thdivision/failure.htm
This would be funny if it wasn't for all the lives that are going to get crushed along the way.
This is unrolling so slow, I will be hard pressed to feel bad for anyone with significant assets that hasn't fled Euro land. Now the paycheck to paycheck crowd, well they are going to get screwed - as usual.
exactly. Reminds me of this famous scene:
http://video.google.com/videoplay?docid=-6814225410937736914
get crushed!
http://www.youtube.com/watch?v=56NPaAwquuo&feature=related
more like this
Now that is some crazy shit.
Sure does have a 2008-like feel in the markets now. I was in Italy in Sept / Oct 2008 right when things were starting to crater. Each day I was emailing a friend or two asking WTF was happpening... When we arrived to JFK on the way home, the Dow fell 777 points.
Ugh...
Welcome to the new normal.
Every time they plug a dyke hole with a finger, a new one sprouts a leak. And there's a lot of dykes
Must........... resist........... funny............... comment .........
after you type "must resist..." please post joke!
15bps in 30 minutes. Buying to save their Euro life.
btw SMP: EUR 173499bn now. Total ECB assets: 2318bn
=> http://www.ecb.int/press/pr/wfs/2011/html/fs111025.en.html
=> http://www.ecb.europa.eu/mopo/implement/omo/html/index.en.html
=> http://www.querschuesse.de/smp-programme-bei-173499-mrd-euro/
Maginot line worked for all of 2 weeks last time around.
Its beginning to look a lot like christmas.
Looks more like Bernanke's ass.
If Italy goes, France goes and if France goes, Europe and the world goes.
Hey, relax everybody, Bob Pisani told me that we were likely to finish up at around 449.9999999 bps so everything is all good.
damn
https://mtrade3.mfglobal.com/logon.asp
Haven't heard much from the rumor mill lately. They are likely to crank that baby up again soon...
You know it's coming. Either China/India/Brazil will support EFSF or G-Pap cancels referendum. Any other market moving rumor idea's out there? I'm not sure what else they can throw out there to move the market. Really not a ton of saving graces anymore. We are nearing the end of the line here...
I'm not sure they have anything left to throw at the wall, I mean where do you go after "massive bailout plan" and "increased firepower" hit epic fail?
don't get me wrong, I'm sure they will try float something out there but it's going to be so absurd that I doubt it's going to make much of a difference. I think the real danger now is in the PTB's trying, in their desperation, something stupid and truly dangerous in terms of a large scale distraction...
be wary of false flags.
Another 50 points down in the S&P and Bernanke "surprises" tomorrow with QE3?
And that helps Italy how? The market is finally pricing in default risk.
Run, Ben, Run. Beg, Timmy, Beg.
If Benny prints 100 billion tomorrow, loads it into a C130 and sends it to EFSF, thats how......... He still has the political capital to do just that.
100 billion? Chump change...make it 10 trillion and that MIGHT keep things afloat, till Friday.
However we're also looking at $7 gas at the pumps as well. Your ante Benny. All-in with that pair of 2's or what?
The word Treason comes to mind.
Not necessarily...
I'm in. We can pay all those fat gubmint pensions in Juden Confetti.
Ze problem, she is solv-ed.
ECB can buy without any fear, because in case of a "voluntary default", they get 100% back + interest. It's a garanteed deal.
Aren't "free markets" wonderful?
Fake prices everywhere on everything in every asset class. And MF Global (along with probably everyone else) caught gambling in the hyper-leveraged Ponzi casino with customers' money.
Anyone who has any money "invested" in any of these markets with any of these crooks should have their head examined.
my gut tells me that this vote by greeks, was all planned to introduce the DM! remember, these elite, soon to burn in hell, create a crises, then come prancing in with a solution!
The DM does not fit the globalist narrative. The DM would be a win for the 99% and democracy.
Amazing world we live in.
One dumbass greek can open his mouth and my portfolio drops five percent.
Thats just the problem today, YOU can be 100% correct in your conclusions, and news of 1 phone call in Europe blows it.
Well you are a top calling troll.
CNBC just report that a YEAR ago Clearnet reported that if italian bonds close above 450bps..Banks WONT have the required Capital to support....Apparently TODAY Italy is in charge of the EU...
So how did this close?
And Italian 2 years will validate this assertion. Should they invert "all hell breaks loose."
There is no hope of a solution. Either massive austerity all over Europe, massive printing of money, or both. Both are incredibly painful. Greek 2 Year Bond Yields Rise to 82.25%, 1 Year Bond at 203.6%! “The Euro” Should Be Renamed “The Gyro”
http://confoundedinterest.wordpress.com/
6 months are at 510%+.