Focusing On The Wrong Zero...
Peter Tchir is tireless today:
The NFP print of 0 today is clearly big news, but Greek 1 year bonds trading at 63 imply an almost 0% chance that they don't default. 2 year bonds are trading at 53. Certainly at those prices, default and recovery are the drivers. If you give any benefit for shorter maturities (which often do get slightly higher recoveries in sovereigns as opposed to corporates) it is hard to see that default isn't being priced in with almost 100% certainty.
On a quick glance, it looks like for recent stress test purposes, banks had to stress 1 year Greek bonds with a 4.5% loss in their bank books. Now the market is saying it is at least 45%. If you don't think Greece is going to default, you might as well buy the 1 year paper. A 65% return. You really think any other asset will provide a return like that? At these prices it is actually getting hard not to own some Greek bonds. They are trading very close to what would seem like reasonable recovery rates. At the same time, it seems hard to go home long the SPX up here with such clear signs that Greece default seems imminent.
Will there be another hopeful yet bogus announcement out of Europe next week that solves this problem? I think that is highly doubtful. And if there is, the risk reward seems skewed to owning something European.
If all we get is operation TWIST, then QE3 will be a big disappointment. In spite of being told by Ben that he wasn't printing money, I believe that at some level, actual holders of treasuries sold them, and re-invested in something riskier, and that went all the way out the curve. It was the sale of treasuries by actual holders (at some level) that spurred the asset valuation. In TWIST, all they would do is let investors out of profitable recent long bond purchases and let them shelter in the short maturity treasuries the Fed would be selling. I'm sure this makes no sense to anyone who understands the Fed, and fractional reserve accounting, etc., but I am pretty sure it was the flow of money (even in digitial form) that pushed people into riskier investments. TWIST makes it too easy for investors to hide out and creates no new money in the system.
We may have Monday off, but Europe is in.
Peter: "labor" day is here. Take a break. We get it: the shit has hit the fan.
PS: LIbor-OIS just hit the widest since April 2009. Cue angry screams of "there is no liquidity crisis in Europe god dammit."
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