The Market Says CYA LTRO To Yesterday's Negativity

Tyler Durden's picture

Via Peter Tchir of TF Market Advisors,


The market is back to being excited and bullish.

Yesterday’s announcement out of Europe was underwhelming, but no one cares as a Greek PSI announcement is expected any moment.  It will be interesting to finally find out how many bonds sign on at the time of the agreement and who the potential holdouts are.

More importantly, once again LTRO is the talk of the town.  Talk is that the demand will be €1 trillion or more (as ZeroHedge discussed here first over two weeks ago).  It will be interesting to see if the number approaches that or is far smaller.  I continue to believe that banks are using it to prefund redemptions and not as cheap financing to start a new round of asset gathering.  All the talk about the “carry” trade makes it sound like something new that the banks have just figured out, when it is the exact trade that got them in trouble in the first place.  Why did banks sell naked CDS on companies and countries (write protection)?  Because they got carry with no funding worries.

At least on LTRO we will get a definitive answer soon.  How much money do the banks need to pre-fund redemption, how much will they take down to have money available for a rainy day, and most importantly, how much do they take down to invest in new assets?

LTRO without a doubt has been positive for bank funding costs. It is letting them redeem existing bonds as they come due and possibly even helping them opportunistically retire other debt at a discount.  Retiring bonds at a discount is an increase to earnings that won’t do much for share price, but does increase “retained capital” so helps the capital ratio of banks.  Buying back subordinated debt is also “capital” enhancing, as the discount comes back as capital.  Retiring Tier I or other “quasi debt” that counted as capital in the first place is less obvious.  That level of capital is reduced while enhancing equity, so some ratios will improve, others may get worse.  In any case all of these activities do subordinate any remaining debt.  All the outstanding debt is subordinated to the LTRO since it is secured financing.  Right now, in the glow of LTRO, no one cares, but any residual sub debt should be viewed very carefully as it is below the depositors, below the LTRO, below the ECB in general, and below senior unsecured debt.  And in the weird world of Europe, somehow they seem to want to treat debt with less than a year to maturity as “safer” than longer dated debt.

I am told I am wrong, at least in part because “how could sovereign debt be trading so well if it wasn’t for the LTRO and carry trade”?

Well, this is the 3rd time in less than a year that Italian 10 year bond yields have improved by 125 bps or more in a short period of time. The first such move tighter was after revised EFSF was announced and Italy was added to the SMP.  The second such move was after the “Grand Plan” was announced.  The third time was late in the year after LTRO and some better auctions.  The point is that moves of 125 bps aren’t that uncommon and aren’t a clear sign that LTRO is working.  What is clear is that the markets are thin, easily manipulated, or scared into big moves, but once the catalyst for that move is gone (ECB gets tired of buying, nothing from Grand Plan works, or LTRO is about prefunding debt not buying more bonds) the market has returned to focusing on deteriorating fundamentals.

I have been told that the Credit Index Trading 101   piece is scarily accurate about how the credit markets trade.  If you haven’t read it, I recommend it.  It is partially tongue in cheek but will help you understand why you need to be careful when looking at moves in the credit markets.

In the meantime the beat goes on in ETF land.  HY ETF’s are on target to have received $4 billion by the end of this week.  The premium is actually reasonable given the strength in the underlying market, but I remain dubious that there is much upside left in the portfolio as too many of the bonds generating the yield have real problems, another group of bonds trades at yields that are hard for “real” money to justify buying, and the final group of bonds have convexity that is bordering on horrific.

The indicated yield of MUB is now below the 30 year treasury yield.  Clearly not the entire MUB portfolio is 30 year debt, but this is worth watching.  The argument that muni’s, even with their tax advantage are trading wider than treasuries is disappearing.  It is a very illiquid market, so maybe the premium is justified, but paying more than 2.5% above NAV for muni’s seems like a bad idea.  The funds have been attracting fresh money, but nowhere near as quickly as the high yield ETF’s.

The CDS indices remain strong and aren’t trading extremely rich, showing that single names have been performing in line with them.

Listening to the “chatter” you would think the market is on fire, yet S&P is barely up in almost 2 weeks (it closed 1308 on the 18th).  For the past couple of weeks, fading rallies has been working well, and I don’t see that changing as more and more people become convinced that “Europe is priced in” and ignore that strong earnings were priced in and aren’t really materializing.

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mattu13048's picture

Armada of forex traders will take care of everything. EURUSD soon at 1.0000... 0.5000 and then 0.0001

LuKOsro's picture

Not to mention gold at 2000 by summer. Interestingly enough there might be some more liquidity from BoJ on the roll.

lolmao500's picture

The market is back to being excited and bullish.

LOL the markets are always excited and bullish. ALWAYS. REGARDLESS OF FACTS.

blindfaith's picture



we'll make the facts up as we go along.

"priced into the market" Oh, like in 2008? or 29? or 87?

LawsofPhysics's picture

Why would you expect anyone to be negative when the heroine is free?  That basically sums it all up.  Black markets are the only free or unmanipulated markets anymore.  

mendigo's picture

Timing is right for DCB (dead cat bounce) - to be followed by roll off cliff

The Axe's picture

The s&p might be close to unch..but not the euro...big move up

disabledvet's picture

And that's why the market is "excited and bullish"...and it is a rip roaring start obviously. The Euro represents nothing less than the total economic dismantling of "Europe." to date "it's going great!" cuz Germany is recovering while calling everyone else bad names. Once this hits France however...and it will...that will be the end. SMOKE 'EM IF YOU GOT 'EM!

Everybodys All American's picture

This hasn't been a "market" for quite some time Peter.

NEOSERF's picture

No it hasn't...I would call it the Peter Pan Never goes down...

Dr. Engali's picture


"The market is back to being excited and bullish"


This never ending grind up where every piece of news is either" priced in" or bullish ,will end in a bad way. My guess is the top will be in when the  over priced IPO Buttbook comes public.

SheepDog-One's picture

Yes we blew ourselves up with this carry trade and we really learned our lesson this back to more of the same everyone...except much more this time? Sounds good.

Vampyroteuthis infernalis's picture

This is why they hire young traders. The youngins do not remember the last market blow up so it is much easier to convince them that continuation on the old route works. Oh yeah, else you lose your job.

NEOSERF's picture

So the Danish banking crisis is getting worse and Dexia is can a bankrupt nationalized bank be downgraded any further than junk...I suppose if the nations that "nationalized" it are failing...

DormRoom's picture 


period: weekly


similar chart.  fade in late Feb?


There is no market.  It's a game of opaque monopoly, where CB will print money to prevent any systemic collapse.  And a silent purge spreads throughout the global economy. 


Already millions of youth across Europe have been purged Existenz.  Relegated to a lost decade. Moreso, in Greece, and Spain.

The rungs on the ladder to the middle class has been severed.  There is no longer social, or financial upward mobility.  One is stuck;frozen in a lost decade, or two.  

The elite still thrive for they have access and control of the rules to the game, and can shape it to their advantage and will.


The game of monopoly, by definition, is a game to control 99%.



CvlDobd's picture

Great post friend. Your VIX pricing is interesting. Hadn't thought of that.

Jim in MN's picture

Gottanotha Swan for ya, bitchez!  Guess what: we only stock one color of swan around here.  See bolded text at bottom.  Naval protection of Chinese territorial expansion....ooooh.....kkkkkk.....I bet we don't have any drones THERE.....LOL...what do Romney and Gingrich say to this one.....

NHK News Japan

China possibly drilling for gas in East China Sea

Flames have been spotted shooting out of a drilling rig in a gas field in the East China Sea, where Japan and China have been discussing joint development.

NHK shot aerial footage last Thursday of the Kashi gas field, or Tianwaitian in Chinese, which lies near the Japan-China median line that separates the 2 countries' exclusive economic zones.

In the footage, men can be seen working on the Chinese-built rig.

Japan and China agreed in June 2008 to begin discussions for joint development of the area.

But in January of the following year, waters around the gas field turned brown, suggesting that China was developing it on its own.

A Japanese veteran oil and gas engineer says he cannot tell whether the Chinese are in a production stage, but the flames and smoke indicate they may be burning natural gas, and that they're continuing development on their own.

Japan's Foreign Ministry has lodged a protest with the Chinese government, saying that China's unilateral development is unacceptable as the 2 countries have yet to agree on their maritime boundary.

China has countered that it was exercising its inherent right to development.

There are multiple natural gas fields near the median line that separates Japan and China's exclusive economic zones in the East China Sea, about 400 kilometers northwest of Okinawa.

The Kashi gas field, or Tianwaitian in Chinese, and the Shirakaba gas field, or Chunxiao in Chinese, lie on the Chinese side of the line. China has been developing them since around 2003.

In 2005, Japan asked China if they could jointly develop 4 of the gas fields in the area.

In 2008, the 2 governments agreed on joint development of 2 areas, including the area that contains the Shirakaba gas field.

They also agreed to discuss joint development of other areas.

But negotiations stalled in 2010 after a Chinese fishing boat rammed into Japanese Coast Guard patrol vessels off Japan's Senkaku Islands.

Yokohama City University Professor Susumu Yabuki says China's aim is not only to secure resources, but also to build a structure near the median line, have the navy protect it, and expand its effective control over regional waters.

Yabuki says the Japanese government must restart negotiations as soon as possible to determine China's true intentions.

Tuesday, January 31, 2012 19:13 +0900 (JST)

Dermasolarapaterraphatrima's picture


"The market is back to being excited and bullish"


Was this written by the NAR?

rsnoble's picture

I can't wait to see the reaction to the Facebook IPO. Hell they could drop nukes on Iran tommorow and it would be secondary news.  It's gone too far.

rsnoble's picture

I recall saying the more screwed up things get the more shit they'll just pull out of their asses and create new shit out of nowhere.

Just like when everyone said the EU can't print. Well those digital zeros are flying off the EU's diskdrives like hot cakes right now.

They'll do anything to stay in power and keep us suppressed. I really think they've gone to far this time and there is no turning back and regrets will be on their faces when everyone realizes we need to get rid of them. Forever.