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JPM Says To Short Spain 10 Years Until 7.75%, Forcing A Spanish Bailout Request

Tyler Durden's picture




 

The short-end of the Spanish curve is collapsing rapidly, and at last check was tighter by nearly 70 bps even with the 10 Year essentially unchanged, for one simple reason: more hope and prayer. This time we have completely unconfirmed and unverified talk that either the ECB will hold another conference, or that Spain will finally request a full blown bailout. Neither is likely to happen, certainly not on a Friday. In other words, the rapid steepening of the curve on more "talking" will not last. What will however, is increasingly negative sentiment toward the longer end of peripheral country bond curves. To wit, here comes JPM recommending a new short position in Spanish 10 Years. Below is the full text of JPM's Gianluca Sanford saying to short the Spanish 10 Year until it touched 7.75%. Why 7.75%? Because that is the level at which Rajoy will have no choice but to demand a bailout. The irony is that the market, by frontrunning politicians, continues to make the required political decision impossible - welcome to the new normal. Paradoxically, only after the market has fully abandoned hope, can the desired outcome happen. But it will take the broken market a few more weeks to figure this out.

From JPM

Mario Draghi disappointed markets at the ECB press conference on Thursday. After his bold comments in London last week led many investors, including ourselves, to expect the imminent re-start of the SMP purchase program, Draghi failed to announce any new immediate measures. Rather, he announced that:

  • Any SMP bond purchases require that the country in question formally requests EFSF/ESM bond-buying support.
  • This request needs to have the appropriate conditionality negotiated, and go through the normal approval processes (Eurogroup finance ministers / parliamentary approvals where required).
  • Only in the context of a formal EFSF/ESM bond-buying program will the ECB consider SMP purchases for a given country. Steps (1) and (2) are necessary but not sufficient conditions to re-start SMP.

Separately, Draghi stated that a) steps will be taken to address investors’ concerns about official-sector seniority, although we are doubtful that this can be done in a credible manner, and b) future SMP purchases would focus on the “shorter part of the yield curve”. In general, details were short and Draghi mainly promised that the “modalities” would be “concretized” over the next few weeks. Other options remain on the table (such as loosening of collateral restrictions, lowering of collateral haircuts, LTROs etc.) but there is significant uncertainty over timing and effectiveness of these other measures.

Clearly, Draghi’s statements were negative for markets, as they indicate that no SMP support will be forthcoming in the near-term. First, the ECB imposed clear conditions on ECB support (and again, note that seeking EFSF/ESM support is necessary but not sufficient). Second, although we think that Spain could theoretically formalize and negotiate a bond-buying request over a relatively short time period (e.g. 1-2 weeks), we do not think Spain is willing to do so anytime in the next few weeks. For instance, Spain’s next bond auction is on 6 September, suggesting little short-term funding pressure; Spain next auctions T-bills on 21 August. Third, note that if Italy were to seek bond purchases from the EFSF/ESM, or Spain were to seek a much larger intervention than the €30-40bn we have previously discussed, it would take much longer to negotiate with political leaders (on the timeframe of months).

Thus, in the absence of the prospect of near-term SMP intervention, we recommend re-entering shorts in 10Y Spain. We target a 10Y yield level of 7.75%, vs. current levels of 7.12%. Spain reached 7.75% on an intra-day basis in late July, and was trading near this level prior to Draghi’s comments last week (Exhibit 1).

We also recommend closing our 2s/4s Spanish curve flatteners. Draghi’s statement that any future SMP purchases will focus on the short end of the yield curve, will likely focus yield pressure on the long end of peripheral yield curves. Thus we recommend exiting this trade at a loss.

 

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Fri, 08/03/2012 - 06:48 | 2675111 Subliminal messenger
Subliminal messenger's picture

It's hilarious. Despite Draghi making a fool of himself, stocks are back up to pre-speech levels.

Fri, 08/03/2012 - 07:02 | 2675127 malikai
malikai's picture

Fading it here once we get the signal.

This is just silly.

http://www.quantsig.net/img/fx_eurusd.png

Fri, 08/03/2012 - 07:04 | 2675131 Bobbyrib
Bobbyrib's picture

Maybe a new season of American Idol was announced late last night.

Fri, 08/03/2012 - 07:21 | 2675149 stocktivity
stocktivity's picture

JPM trying to rig the markets...I can't imagine they would do such a thing. It's all such total BULLSHIT!

Sat, 08/04/2012 - 10:24 | 2677871 jonytk
jonytk's picture

happend in greece, they had those CDS...

Fri, 08/03/2012 - 07:53 | 2675185 Waterfallsparkles
Waterfallsparkles's picture

Subliminal,

"It's hilarious. Despite Draghi making a fool of himself, stocks are back up to pre-speech levels."

Weekly Options are now the new Tail that Wags the Dog.

Fri, 08/03/2012 - 06:49 | 2675112 Gief Gold Plox
Gief Gold Plox's picture

It feels horrobly wrong to do what JPM recommends. No matter how logical it sounds, I just can't be on the same side of the bet as JPM.

Fri, 08/03/2012 - 06:54 | 2675118 cossack55
cossack55's picture

Additionally, you do not want to be on the same end of the rope as The Morgue.

Fri, 08/03/2012 - 07:01 | 2675126 HungrySeagull
HungrySeagull's picture

I don't know. It seems you must do the OPPOSITE of what they tell you.

 

It's almost like JPM Needs the herd to run a certain way so they can trade the other side.

 

Fri, 08/03/2012 - 07:07 | 2675136 Gief Gold Plox
Gief Gold Plox's picture

Wonder how long till they pickup on the "do the opposite JPM says" and start playing us with reverse-reverse psychology tactics.

Fri, 08/03/2012 - 06:51 | 2675114 RobotTrader
RobotTrader's picture

Futures in Europe are screaming higher

Fri, 08/03/2012 - 06:56 | 2675120 nmewn
nmewn's picture

Its not where it opens that matters Robo...its where it closes.

But you already knew that ;-)

Fri, 08/03/2012 - 07:27 | 2675162 lewy14
lewy14's picture

Markets are ripping higher right now (mid-day-ish in Europe).

Why? Did everyone wake up and say Oh Mine Gott das DAX ist Gehfundermentallyundervalued!!!

No. Of course not.

They all woke up to the same realization that Bruce Krasting talked about - the EUR is the new "village"...

to wit: Draghi has to destroy the EUR (in value) in order to save it (from extinction).

The melt-up is a symptom of currency destruction.

Large cap global stocks are something you can't be completely out of, no matter how bad the fundamentals look.

Fri, 08/03/2012 - 07:59 | 2675196 Waterfallsparkles
Waterfallsparkles's picture

Ramping it higher now on QE3 hopes for September or a suprise inter meeting announcement by Bernanke.  He loves Short Squeezes.

Fri, 08/03/2012 - 07:05 | 2675132 Gief Gold Plox
Gief Gold Plox's picture

Yes, but Au/Ag priced in EUR is tanking... and I've got me some colored paper, I'd rather exchange for base metals than other colored paper.

Strange, I know.

Fri, 08/03/2012 - 06:52 | 2675116 cossack55
cossack55's picture

The market is broken. Huh, who woulda thunk.

Fri, 08/03/2012 - 06:53 | 2675117 EZT
EZT's picture

dead cat

Fri, 08/03/2012 - 06:55 | 2675119 q99x2
q99x2's picture

Not in the history of stock markets has everything been as negative as today and stocks are headed much higher - up over 1%.

Chased me away into buying some gold. Markets are too dangerous because when everything does not make sense then you are likely to have everything stolen.

Still no prosecutions so it is open season for anyone with money in the markets. Banksters are coming for it.

Fri, 08/03/2012 - 07:28 | 2675163 Meesohaawnee
Meesohaawnee's picture

Dead on!!! amen brotha.. No day like today i get the memo on futures every morning "dont you dare trade this bitch on fundamentals" ..Either this is a silly game or someone knows something and is front running. I dont even turn my trade station on anymore. Its such  a joke. This dude in the WSJ (not that it matters) wrote a piece about retail fleeing because of volatility. Yea right. Not even close.Actually its just the opposite. Its the lack there of, knowing nobody in their right mind would go long in this abortion really is the issue. Retail has figured out  data means nothing. Markets are just propaganda tools to keep the masses calm as to how fucked up  things are. Go look at the chart from july employment and tell me fundamentals matter. Theres a short ban in effect in the peoples republik of america. Wake me up when its lifted.Actually i think retail would be back if markets actually traded on fundamentals but wed be at SPY 1000 if that were true. Now that doesnt get presidents re elected now does it?

Fri, 08/03/2012 - 07:32 | 2675168 HelluvaEngineer
HelluvaEngineer's picture

I still don't get it - seems like the big money can be made burning it to the ground.

Fri, 08/03/2012 - 06:56 | 2675121 ThunderingTurd
ThunderingTurd's picture

Is anyone else getting the sense that regardless of how terrible the information flow this world equity markets are headed one direction and one direction only?

Fri, 08/03/2012 - 07:00 | 2675125 hedgeisforpussies
hedgeisforpussies's picture

yes  but that was the same before 2008 crash. they kept plastering the dead body so that noone would notice its dead until they did. markets dont remember what they had for diiner last night hence policiticians use the same trick over again. 

Fri, 08/03/2012 - 07:24 | 2675153 ThunderingTurd
ThunderingTurd's picture

You are right Hedge. I believe the pullback will begin right after the Olympics. Just as it did in '08.

Fri, 08/03/2012 - 07:02 | 2675128 hedgeisforpussies
hedgeisforpussies's picture

in fact it took 2.5 yrs before people realised its over - 2006,2007 and half of 2008! 

Fri, 08/03/2012 - 07:03 | 2675130 Peter K
Peter K's picture

Whatever it takes to get Euroland through the holiday season is ok. Remember, it is August already :)

Fri, 08/03/2012 - 07:04 | 2675133 spankfish
spankfish's picture

"Why 7.75%? Because that is the level at which Rajoy will have no choice but to demand a bailout."

Rajoy will throw himself on the floor and do the dying cockroach long before the 7.75% mark.  This should make for great theater.


Fri, 08/03/2012 - 07:42 | 2675176 K_I_T_T_Y
K_I_T_T_Y's picture

He may throw himself to the floor, but not to the one you would expect....

Spain already has a lot of special bilateral agreements with China.

Fri, 08/03/2012 - 07:05 | 2675135 firstdivision
firstdivision's picture

Spanish 10 year yield is collapsing.  Those that followed JPM's advice are already stopped out.

Fri, 08/03/2012 - 07:08 | 2675138 milanitaly
milanitaly's picture

Italian market has no logic today.

Fri, 08/03/2012 - 07:09 | 2675139 Haager
Haager's picture

What is this, banks on a dog-fight? It sounds right to short spanish bonds at 7+ level, but I don't expect them to rise in near tern close to 7.7. The most interesting things don't take place in spain, actually... We need to look at  greece.

Fri, 08/03/2012 - 07:09 | 2675140 dwayne elizando
dwayne elizando's picture

So JPM is saying punish Draghi for not delivering. Fuck you JPM!

Fri, 08/03/2012 - 07:27 | 2675159 ThunderingTurd
ThunderingTurd's picture

Reuters just published the following story, "Knight Trading Error Shows Cracks in Equity Markets". Really?

Fri, 08/03/2012 - 07:32 | 2675167 max2205
max2205's picture

I thought JPM went back to being a bank.

Jamie, STFU

Fri, 08/03/2012 - 07:40 | 2675175 K_I_T_T_Y
K_I_T_T_Y's picture

I wonder what would happen if all spanish citizens would short JPM till 7.75....

Seriously I prefer to be long Spain than JPM... ;-)

Fri, 08/03/2012 - 07:47 | 2675180 max2205
max2205's picture

Write to Jon Hilsenrath at jon.hilsenrath@wsj.com

Fri, 08/03/2012 - 07:57 | 2675192 dcb
dcb's picture

the bankster trading thigs to the point they get tax payer bailouts. I beleive we have seen this happen in the united states. it worked so well, record bonus season!!

Fri, 08/03/2012 - 08:03 | 2675203 graymnzrc
graymnzrc's picture

"welcome to the new normal. Paradoxically, only after the market has fully abandoned hope, can the desired outcome happen."

-Whose desired outcome? Germany's? ZH's?

BTW- I have seen the dieing cockroach firsthand. Eventually the person will start to lose energy and slowly "die".

Fri, 08/03/2012 - 08:11 | 2675212 Zero Govt
Zero Govt's picture

"The irony is that the market, by frontrunning politicians, continues to make the required political decision impossible..."

Unless you're a politician and front-run the market by slapping a 3 month long short-selling ban on the marketeers

So problem solved.

Spanish Bonds solid as a rock now, "Priced to Don Quixote" as they say in Spain, Govt intervention saves the day by putting another spanner in the works of the market (reality) working

I prefer Spiderman towels as a form of market intervention myself, but there you go!

Fri, 08/03/2012 - 08:35 | 2675268 Treason Season
Treason Season's picture

"Priced to Don Quixote" as they say in Spain,

Do they really say that or did you just make that up?     

Que rico!

Fri, 08/03/2012 - 17:30 | 2676904 Zero Govt
Zero Govt's picture

i made it up in Spain... so at least 1 person has said that here

Fri, 08/03/2012 - 08:36 | 2675271 Ted Baker
Ted Baker's picture

DEAR MR DIMON WE WANT JPM TO TELL US THE REAL LOSS AT ITS CIO UNIT THEN WE CAN ASK FOR HELP

Fri, 08/03/2012 - 08:46 | 2675322 WaEver
WaEver's picture

it's easy to advise what to do with other people's money....

Fri, 08/03/2012 - 11:39 | 2675962 Remington IV
Remington IV's picture

another Fed rumor around the corner

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