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The Italian Yield Curve Vs The Euro Basis Swap
From Peter Tchir of TF Market Advisors
The Italian Yield Curve
With all eyes focused on Italy and the “success” of Italian bond auctions, I thought this chart might be useful.
Attention has been on the 10 year (was 7% again until earlier this morning) and how much cheaper the 2 year came than just a few months ago.
Clearly Italy has done some things to calm the markets. When 2’s and 10’s were inverted back in late November, the market was extremely nervous that Italy was headed towards default. Inversion is a clear warning sign. The move to a more “normal” or “steep” curve has been impressive, but is it becoming too impressive? It is now steeper than at any point in the last 8 months. It is steeper than before Italy was really on anyone’s radar screens as a potential default candidate.
This is evidence that the LTRO is working to some extent, though probably by reducing asset sales rather than increasing asset purchases. It may also be that the market has digested the MF Global sales of short dated Italian paper (and those who bought it from them at a nice discount the weekend of the bankruptcy). It may be that other institutions are done cleaning up positions that looked similar to those of MF Global (remember the repercussions of the trade killed MF, but the trade itself worked).
In any case, I think the unnatural steepness means it is hard to look at the auctions and accept them at face value. It is yet another data point that really isn’t a data point. Throughout this entire crisis (going back to 2007), the governments and central banks have made efforts to “fix” certain things. If LIBOR gets too high, then they take action, that at least temporarily improves LIBOR. Those who look at the “improved” data and think the problem has been fixed have been proven wrong, as the market exposes other holes and eventually even the government and central bank money can’t keep the prices artificial for too long without forever increasing the amount of public money at risk.
There may be no better example of that phenomena than the Euro Basis Swaps.
To some degree, this rate measures the difficulty that European companies (banks) have when trying to get dollars. The First “globally coordinated” action in September brought the rate back from-110 to -80. That faded until it hit an almost scary -160. The Second “globally coordinated” swap line action got us all the way back to -110 (about the same level that had sparked the first action). We retraced some of those gains, saw fresh gains on the back of LTRO, but again have stabilized at rates that are worse than what the policy makers have targeted. Where would these rates be without intervention? Should we be happy about the improvement, or should we be concerned that in spite of all the intervention, this is the best they could do?
In a somewhat free market (somewhat free markets seems the best we can hope for) you could look at this data and say that the situation has improved. Given all the intervention, I think the basis swap is telling us that the market continues to deteriorate for Europeans and the overly steep Italian yield curve is a sign that manipulation is driving prices and not actual market belief in a resolution.
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Goverment manipulated fraud, it is now global!
"manipulated fraud global"
Or...
MF Global.
The Fed's covert bailout of Europe
http://gata.org/node/10825
And the money comes out of the taxpayers ass!
How much harder do we have to work before its easier to fight?
yeah, thanks you for that. We are having sexy times all over Europe now. Big public-sponsored bikini parties where every European is asked to place at least 50 dollar bills (which we got for free from our local bank branch) in girls's panties.
all is good in Europe!
Yup! I feel Great! Me and my family are all still alive!
OT, Tyler, any investigative piece on why the Muni Bond market has not experienced major dislocations such as Cali bonds as predicted by several prominent muni bond traders? Has it been successfully papered over by Mystery Buyer?
Thx Peter.
The real problem is not Italy...will be Spain and then the D/G of the EFSF
Nobody trust in italian authorities.
Lack of confidence accross the world has just started.
Italian bonds must have a haircut between 20-40% or yields gonna rocket to 9%-10%
GS trusts Monti, apparently, otherwise he would not have gotten the job
Spain ? Yes, but watch Portugal.
And Spanish exposure to Portugal. Not much help for the Portugese over the last few months. 10 year's have been consistently high and unsustainable over the last few months with no apparent political will to bring them down.
The ECB can't fight on so many fronts at once forever. Eventually they'll have to choose where their line in the sand is going to be and it appears Portugal, and thus Spain, are the wrong side of that line.
portugal has to go
As they say in fashion, red is the new black.
Reality: the overly steep Italian yield curve is a sign that manipulation is driving prices and not actual market belief in a resolution.
Sentiment: you could look at this data and say that the situation has improved
This will go on and on.
In a somewhat free market (somewhat free markets seems the best we can hope for) you could look at this data and say that the situation has improved. Given all the intervention, I think the basis swap is telling us that the market continues to deteriorate for Europeans and the overly steep Italian yield curve is a sign that manipulation is driving prices and not actual market belief in a resolution.
Peter, you could say that about all markets right now.
Crisis is over.
Italian bonds floated with ease at 3.5%.
ES futures near the highs.
Gold continues to get smashed.
U.S. Treasuries still pinned near the highs.
USDX still strong. The only one stronger is the Yen.
Gasoline and agricultural commodity prices still falling throughout the U.S.
Virtually every market is under 100% control by TPTB.
Strong USD when most US based co's sales have been overseas means Q4 bloodbath.
'Crisis OVER"!
Well...at least as long as complete govt control and manipulation and endless free 0% money printing go on without pause or question, forever.
MomoSpammer,
Go long SPX, US Dollar and short AU, AG and the CRB and let us know how well you did at the end of January.
BTW, crude is over $101 jackleg...
I remember your wildebeest posts from a few years ago, and I think the crocs have their eyes on wildebeests who buy Italy paper, at least the paper with a longer tenure than the LTRO. I think we'll see when Italy goes out more than three years who lunch is going to be, though year end considerations might postpone the actual meal until next week. I suspect you know that, and you are just trying to get a rise out of the peanut gallery. TPTB have too many balls in the air now, and some are going to fall.
ecb will do 5 year LTRO next
You're probably correct. After that it will be perpetual + 1 day. In fact, I believe somewhere in Revelations it says the last task of the stableboy of The Four Horsemen is to close out the ECB's LTROs.
when looking at the http://www.traddr.com/forum/topics/daily-technical-analysis-by-fxcc-28dec11 ">euro we can see the technicals stating clearly that something is afoot http://www.traddr.com/forum/topics/daily-technical-analysis-by-fxcc-28de...
Are they cancelling the next auction? Something is wrong
You DON't cancel, you "control"....
Another day, another manipulated market indicator. If everything was fine and rosy there would not have been any need for someone to step in and "do" something to fix things.
Hat tip from Mish:
http://globaleconomicanalysis.blogspot.com/2011/12/european-bank-to-bank-lending-mistrust.html
9 billions E @ 3.25 %, ST bond 6 months, is what happened in Italian Eurobond offering today ...as opposed to 6.5% on November 25 for similar offering. What a yo-yo this is!
As previously remarked, the Oligarchs now are getting a sense of discipline but will it hold? Those rogue HF and speculative plays always come back with a vengeance as soon as the music stops...and there is one chair less in the market! Yikes! We have no idea how big is the crappity crap heap in the debt mountain shadow banking under the red carpet.
Oh, for a Houdini and a "hey presto" Jubilee.
So when the armageddon fails to materialize, blame it all on some manipulation....where is CIA in this?! And Area 51?
The Fed and ECB had vindicated all market controllers of the history: Stallin, Mao, Kim ... And the modern controllers have set the bar of printing money and "improving" data to a new historical height.
http://confoundedinterest.wordpress.com/2011/12/28/ecbs-balance-sheet-go...