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As Italian Yield Curve Flattens Dramatically (8 Standard Deviations), Is JEF Facing More Stress?
Based on the detailed exposures and DV01s thet Jefferies released on Friday, which we discussed as evidence of an implicit 2s10s (approximate maturities) curve steepener, it would seem that the dramatic shift flatter in the Italian bond curve this morning could be problematic. The huge 35-40bps compression in the spread between 2Y and 10Y BTPs is the second largest ever (largest being 4/8/11) and represents an 8 standard deviation drop compared to the last 8 years. This could mean a significant loss for the JEF book - unless they are perfectly hedged through BTP futures - which it does not seem is clear from the exposure sheet. The Italian yield curve has flattened over 100bps since the end of the EU Summit - inching perilously close to inversion which hasn't been seen since 1994.
ITA 2s10s is over 100bps flatter since the 'savior' of the EU Summit. Duration neutral flatteners would be around 4-5:1 in terms of 2Y notional to 10Y notional and the JEF DV01s show that kind of exposure. We would assume that JEF has been stuck with these positions in their flow books as smarter moeny is likely playing the downside flattener trade here - leaving the broker with the other side. We only hope they are dynamically hedging though today;s move will leave big holes in terms of basis moves no matter how well hedged.
And as if we haven't broken enough records recently, this shift of over 8 standard deviations is the second largest absolute move ever and we note that there has been 4 extremely highg sigma events this year which must force risk budgets to be reduced in the Italian bond markets - further limiting demand for this sovereign debt.
Chart: Bloomberg
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Give it a few hours, and it won't be a record any more.
Ironic that if French debt becomes a safe haven from Italy, the LCH Clearnet collateral trigger on Italy becomes more likely.
Whereas if France is pulled down with Italy, both are safer from the trigger! :)
It sure is...
... get that re-re-release out pronto.
Nov. 7 (Bloomberg) -- Germany won’t let its central bank’s
gold reserves be used to bolster the power of the rescue fund
for indebted euro-area countries, Economy Minister Philipp
Roesler said.
“The German gold reserve must be untouchable,” Roesler
said in an interview on Germany’s ARD television network today,
echoing Chancellor Angela Merkel’s chief spokesman, Steffen
Seibert.
Seibert denied a weekend newspaper report that using the
Bundesbank’s gold and currency reserves was mooted as part of a
debate on boosting the rescue fund, known as the European
Financial Stability Facility, at the Group of 20 summit in
France.
Germany rejected a proposal by some participants at the
Nov. 3-4 meeting in Cannes to use the International Monetary
Fund’s special drawing rights to bolster the EFSF, Seibert said
in an e-mailed statement on Nov. 5, responding to the report in
the Frankfurter Allgemeine Sonntagszeitung newspaper. “At no
point in time” were the Bundesbank reserves on the table, he
said.
“We are familiar with the plans and we oppose them,” a
spokesman for the Frankfurt-based Bundesbank said.
Yesterday's News ??
http://www.zerohedge.com/news/g-20-demands-german-gold-keep-eurozone-intact-german-central-bank-tells-g-20-where-stick-it
Italian bonds maturities
http://tinyurl.com/cv9zdlo
Thanks Minoan,
2012 is a big year for Italy then.
And for the rest of most European country's also.
BUT!!
1 Rumor that Berlusconi is resigning is enough to push the markets 4% higher from their lows today.
YOU CAN FIX DEBT PROBLEMS THAT EASY YOU KNOW!!
SO:
IF EVERY EUROPEAN PRESIDENT RESIGNS: ALL PROBLEMS SOLVED!!!
no, not exactly! we have to replace them with former leading goldman sachs heads first. then, and only then, EVERYTHING will be fine!
uh oh... does this mean that if Belgium gets a government Belgian Sovereign Bonds yields increase dramatically?
IF we would get a government within 50 days (HAHAHAHAHAHA) yields would decrease because that would mean they found a way to cap the deficit and increase taxes with 5%.
But no political party dares to propose that so we won't have a government before June 2012.
As for now, taxes need to increase so much that they need to find 1200 euro per citizen to cap the deficit for 2012. On average that would mean 5000 euro per working person extra in taxes!
They could also try to make savings on government expenses, but as it are socialists who are making the budget, that's a NoNo.
You wouldn't believe the proposals they are making right now. All of them are hughe taxes on the middle class who have some money or a property. It's like the communists who go to war against the "capitalists".
And for now, they haven't done shit. Oh wait! They do did one thing already!!! THEY GAVE ALL GOVERNMENT WORKERS A RAISE WHILE WE'RE ON THE FOREFRONT OF MASSIVE TAXES AND SAVINGS ON THE WORKING MIDDLE CLASS FROM THE PRIVATE SECTOR!!!
Our situation over here is so dire, nobody really believes the shit that is planned to happen. We'll join Greece within 12 months if things proceed like they are doing now.
If our country was a company, we would have gone bust 50 times over in the last 3 years.
Funny thing how Greece has been slow playing their pair of Aces and are about to become irrelavant as stronger hands demand attention. Greece will soon be on the Drachma, kicking and screaming for respect and attention for those Aces when the table is showing a potential Royal Flush. Greece should get ready to be swept into the dark corners of the news cycle as a panenthetical along with mainstream media coverage of Egypt, Tunisia and Iceland. Note to Greeks: The longer you play your Aces as if you have the NUTS and allow the rest of the Global Financial System to "draw" attention will be all the less significant your crisis will seem and all the more doomed your entire country will become. The world is sick of your deal making, extortion, lying, sloth and your overall general financial parasitic nature. Good Luck as you continue to bluff your way out of a chair at the EU Poker Table.
PUNATITIVE URSURY BITCHEZ!
Financial Repression bitchez!
Why would Jeffries bother to be in the trade if they were perfectly flat? What kind of moron would bother?
It's regime change dear Ladies and Gentlemen, nothing more nor less. Merkozy wants Berlusconi out. Put in their own man. Scare the shit out of everyone in the process. Still beats Blitzkrieg over Poland but this is war, make no mistake about it.
LIBERTE, FRATERNITE ET EGALITE!!!
Mais pas pour les Italiens :)
just a "mild recession." move along...
SUDDEN DEBT you right on it a 4% move over in the BOOT,,,why the rumour mill now starts when Italy goes down...please shot ,me
Italy government 10Y was over 10 percent, peaking almost 14 percent with similar debt load of 110-120 GDP during late 94 to spring 96. Still no default.
www.tradingeconomics.com/italy/government-bond-yield
Let me guess. One American economist just decided one day 6-7 percent is the pain threshold for Italy and economists all over the world repeated this like obedient little monkeys they are.
I was a young kid during that period and with my parents we went on vacation almost every year to Italy.
Italy was poor during that time, it was like visiting the past.
Real estate was dirt cheap back than, unemployement was skyhigh and the infrastructure sucked.
Tim you and some other europeans were happy to trash the USA when we were having problems and telling us it was time for our comeuppance.
Are you a little sensitive?
It sounds like deep down inside you are really scared that Europe has totally fucked up this time. Else why the rhetoric over the last few days?
This is the Arab spring in negitive. G pap and Bellisconi are going because they aren't towing TPTB line.
As we go thru the Euro disiaster queue - alphabetically it seems and how polite - by the time we get to the S's ( Spain ) will it be like the zen koan - does the falling tree make any sound if there is nobody there to hear it. Will I still have the "internets". Figure I should get a jump start on vacation planning.
Finally, something to read. I don't even bother clicking anything under 5 standard deviations anymore......hehe