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L'orrore, L'orrore... In Three Quick Charts
There are several moving parts in the drama that is Italian credit markets. Unfortunately no matter which measure a trader or PM looks at (unless you are Blackrock's un-MtM-able book), it seems increasingly clear that the Italian funding situation is rapidly shifting to a low-confidence/default-equilibrium and jumping the chasm to high-confidence/no-default seems further and further away. Unintended consequences, as we have discussed at length, from the EU Summit (exemption of official-sector holdings from haircuts, non-triggering CDS logistics, and an EFSF unable to cope with a sovereign like Italy) leaves traders/managers with a binary decision on investment. While yields may seem attractive, the size of systemic risk being engaged being long BTPs is huge compared to a GGB 'bet' and unless the ECB steps in with an unlimited bazooka, no amount of yield support will cover the MtM losses managers will face as they 'im'patiently wait for reform.
Most obviously, post summit, the spread between BTPs and Bunds has exploded 140bps!:
The angst in the CDS market has caused traders to reduce exposure (since their hedges have become useless - or potentialy useless). Basis traders will demand far larger differentials going forward to cover any event risks given the uncertainty the GRE decision has caused. Bonds have hugely underperformed (110bps!!) CDS post summit:
So do not expect the basis traders or hedge funds to step in any time soon...This unwind of the basis trade has caused a major dislocation in the Italian yield curve as the 5s10s differential has inverted for thew first time since 1995 and is inverting further as the 5Y liquidity point gets unwound (60bps of flattening post summit!!). The front-end of the BTP curve continues to rise (in yield).
It is hard to see a positive outcome here as patience will be very thin. Brokers with large basis and curve risks on their book may feel some comfort but the size of these moves will smash risk budgets everywhere and cause risk managers to reduce exposures further - creating the negative cycle that we have been so worried about.
Charts: Bloomberg
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everything's evolving, everything's falling apart
I watched a snail crawl along the edge of a straight razor. That's my dream; that's my nightmare. Crawling, slithering, along the edge of a straight razor... and surviving.
Good that there is no correlation to US Equity Markets!!!
APOCALYPSE NOW, BITCHEZ.
Apocalypse three years ago!
"The Whorer, The Whorer......."
Was he referring about certain politicians?
how is Pimco PTTRX handling its European exposure ?
& SP500 is where exactly?
what a mess!
back to real work......
"The white man is very clever. He came quietly and peaceably with his religion. We were amused at his foolishness and allowed him to stay. Now he has won our brothers, and our clan can no longer act like one. He has put a knife on the things that held us together and we have fallen apart."
- Chinua Achebe, Things Fall Apart, Ch. 20
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The activity of savings among mass population is only 300 years old. When confronted with it, our brains--not hardwired for abundance (credit)--is at a loss. And things fall a apart.
So what're ya lookin' at in student loans there big guy?
They will have to crash it soon, otherwise gold will show them up swimming naked.
Italian bonds have jumped the shark.
Who is going to buy this crap when the CDS (insurance on them) has been proven to be a fraud (50% haircut ruled "voluntary")?
Excactly... that is what happens with you change the rules - that uncertainty created by the 'voluntary haircut' being proposed for Greece changed everything and accelerate the run on Italy. They just need to let the system work as it was designed. They built this beast and now they have to live with it!
The Germans, of course. They are known to buy really dumb stuff.
dup
if european banks are selling all their sovereign debt and individuals are
taking their money out of banks, what is left
http://www.youtube.com/watch?v=JHYIGy1dyd8
kinetics and dominos
A big mistake to not payout on the CDS, Risk has been transferred back to the Bond Market where it rightly belongs.
Obvious truth you speak.
Yet if a politician reads this he or she will not understand what you mean.
Cheeky Bastard - is that you?
you became a Tyler didn't you?
And equities keep churning higher both in Europe and US. Judging by macro data Europe's in recession already, especially the peripheral countries like Italy, Spain, Portugal and Greece. Sovereign debt gets monkey hammered country by country and now we are witnessing the 3rd biggest sovereign debt market in the world, Italy, melting down. Hardly a fundamental background that is supportive for equities. So that leaves me with the question that are equity markets, as usual, really not getting it or are they just pricing in full blown global stealth monetization of everything?
THE HORROR!
http://www.youtube.com/watch?v=aNUr__-VZeQ
Commodity prices are moving so slowly that cash hoarding is becoming the preferred status-and will lead to recession soon:
http://saposjoint.net/Forum/viewtopic.php?f=14&t=2626&p=35012#p35012
The dreams of men, the seed of commonwealth, the germs of empires.
Soluzione: Draghinflazione. Stampare Mario!
In equities. it is like a tight rubber-band, you keep snapping it, and it expands but stays in place UNTIL you snap it once too many times and it withers away!! The CDS market was that snap!! They made an insurance product that doesn't pay out, now they have to re-hedge(unwinding) by selling the stuff outright!! It will all come crashing down when the banks stop repratriating all their assets from the U.S. and the Euro falls like a knife.
The recent shitstorm in bank holdings of Sov debt will only fuel the fire as the firm risk to holding this stuff gets higher, if only for the fact that investors are rooting out the holders and punishing their stock...no one wants to be the next Jefferies. Even though they've recovered, who wants to deal with that kind of headache?
No, Virginia, there is no Santa Claus.
100% bears make for a market ready to bounce. Hard.
Italian default here we come. Finally a lehman event x1000...with Greece following suit.
Remember the ECB prints or leverages up the ESFS to print job kill machine. Merkel might as well leave Germany re: 1920s inflation redux. The Germans are preparing for EZ defaults.
And apparently, if Berlusconi goes, this is all magically resolved? Please place your bets for the halflife of that event... I give it a week
We are the hollow men.