The One Chart To Explain Why ECB's Short-Dated Bond Buying Program Will Fail

Tyler Durden's picture


Don't look at 10Y Spanish bond yields; ignore Swiss 2Y rates dropping; it's all about the front-end of the Spanish yield curve - that's your tell that "everything's awesome." We even saw some proclaiming the 5Y Spain 'strength' as indicative that the market is 'buying it, and Draghi will deliver'. Problem is - he can't! Even if he announces a non-monetizing short-dated monetization plan, and gets it by his BuBa buddies - the market knows the problem: that without this 'temporary feature' becoming permanent (and therefore the ECB basically embarking on open-ended monetization - see Gold), the market expects Spain's short-dated cost-of-funding to more than double (to 6.5% from 3% currently) over the next three years. The steeper the curve, the more the ECB will have to buy and while thin illiquid bond markets manipulated by CB intervention are 'most' people's indicator, consider youth unemployment, capital outflows, and loan delinquencies before becoming euphoric.

The chart below shows the current Spain curve (orange) which indicates the term structure of interest rates (or cost of funding) for Spain issuing debt at varying maturities...


The other lines indicate what the 'market' expects (implies) that cost-of-funding to be in 1, 2, and 3 years from now... as is clear - the cost of funding soars! even at the front-end; this means implicitly that the ECB will need to work harder and harder to keep those rates down.

The trade, of course, in the short-term will be hedgies grabbing SGBs just outside of the ECB's mandate (if rumors are to be believed 3 years) and riding them into the 'buying range' - earning carry and then selling back to the ECB (cap gain) - this will work until (as always) it gets crowded (and will drag the curve lower we suspect  which will be heralded as indicative of market support and belief) and then suddenly risk will want out in a hurry and unlike Corzine, they will suffer MtM losses and be squeezed - good for a trade maybe? but crowded and prone to illiquidity gaps - surely.

Chart: Bloomberg

Your rating: None

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Tue, 09/04/2012 - 12:29 | 2760753 fonzannoon
fonzannoon's picture

The good news is the dow is not allowed to fall 100 points.

Tue, 09/04/2012 - 12:45 | 2760764 Dr. Engali
Dr. Engali's picture

In the really important news of the day.....Apple just announced a media event on September 12th were they expect to unveil the new and improved iPhone.....the iPhone IV is coming yeahh (sarc)....hey wait a tick isn't there some important news coming from Germany on the 12th?

Tue, 09/04/2012 - 15:25 | 2761500 Ratscam
Ratscam's picture

a client of mine flew 106 tons of Iphone 5 last week from HKG to Luxembourg

Tue, 09/04/2012 - 12:37 | 2760799 Mongo
Mongo's picture

Sorry Mario but the princess is in another castle ...

Tue, 09/04/2012 - 12:39 | 2760812 Zero Debt
Zero Debt's picture

Is this a signal to bet on the curve steepening even further?

Tue, 09/04/2012 - 12:44 | 2760813 BlandJoe24
BlandJoe24's picture

Attention ZH prognosticators and clairvoyants!  Upcoming puzzle for Thusday (ECB meeting):

If the ECB announces bond-buying program, will the EUR, in the short term:

- FALL, because a bond-buying program is necessarily a EUR printing program?

- RISE, becuase a bond-buying program will "help" the EZ periphery and thus "strengthen" the EUR?




Tue, 09/04/2012 - 12:44 | 2760832 Wolferl
Wolferl's picture

The Euro will rise, cause the Dollar will fail.

Tue, 09/04/2012 - 12:54 | 2760876 agent default
agent default's picture

The Dollar maybe a clusterfuck, but at least it is a one man clusterfuck.  The Euro is clusterfuck with a committee on top of it.


Tue, 09/04/2012 - 14:17 | 2761222 Ghordius
Ghordius's picture

and Draghi on "top" of the committee - I wonder which one will be more... efficient?

Tue, 09/04/2012 - 12:50 | 2760863 Essential Nexus
Essential Nexus's picture

First, I don't think they'll anounce a program on Thursday.  Second, RISE because it seems the predominating analysis in markets is Keynsian.  Of course, it will long term fall relative to gold.  The trade then, is BUY GOLD.

Tue, 09/04/2012 - 14:13 | 2761207 Ghordius
Ghordius's picture

you had me at buy gold

Tue, 09/04/2012 - 14:53 | 2761383 youngandhealthy
youngandhealthy's picture

Rise...because the spot-light will then turn to the USD were the problem is even worse.

Tue, 09/04/2012 - 15:45 | 2761553 Gief Gold Plox
Gief Gold Plox's picture

I'm betting it will initially rise because the media will trumpet it as a sign of resolve, another historical step (must be something like a hundredth this year) and the masses will buy into it. A week later the truth of the matter will start to sink in and I suspect all gains will be retraced within a few days.

Tue, 09/04/2012 - 12:43 | 2760830 teahouse
teahouse's picture


The only demand for US treasuries are interest rate swaps creating false, artificial demand, and the IR swaps are what have caused the 10 year rallies and the ‘flight to safety’.

Tue, 09/04/2012 - 12:44 | 2760833 Schmuck Raker
Schmuck Raker's picture
"The One Chart To Explain Why ECB's ______ _____ _____ Will Fail."

I'll save this for you to use again later.

Tue, 09/04/2012 - 12:46 | 2760839 falak pema
falak pema's picture

if we enter the age of peak fiat, all these arguments fall apart. In peak anything the market is considered redundant by definition, as supply ALWAYS lags demand until a substitue product comes along. In stategic areas like oil, money, guns, society has always imposed cartels, as free markets are too dangerous for the mainstream quantities, that the political elites want controlled for their survival, but not for the marginal trades. We shall soon be there for money trades.

From that day onwards the political elites will decide the time value of money on an arbitrary basis like a fudged Libor.  World Oligarchy control, or the inevitable subsequent rug pulling, amongst rival interests,  will then lead to war.  And we will resolve our deflationary cycle the usual way. 

Peak money is the ricochet point on the wall of diminishing returns, the resulting open animosity amongst the rival oligarchy groups to find issue is the tipping point leading to new Armageddon. 

Tue, 09/04/2012 - 12:51 | 2760861 youngman
youngman's picture

What you just explained here is what the market is today....playing the game...buying longer term and riding it into the 3 year window to play the game for a few basis points......the game......what used to be a bond market where the Country you were buying the bonds from entered into the equation...economies...GDP´s its a bunch of lawyers reading the fine print trying to find a window or a hole to play into....the Central Banks have destroyed the "MARKET" ...its gone

Tue, 09/04/2012 - 13:17 | 2760955 yogibear
yogibear's picture

QE forever by Goldman Sach's Mario Draghi and Benny the print master Bernanke.

Trash the cash is their motto.

Tue, 09/04/2012 - 13:40 | 2761042 vertexa
Tue, 09/04/2012 - 13:43 | 2761057 Yen Cross
Yen Cross's picture

 I can't wait to see how these European banks are going to pay the "ECB" back, " LTRO 1&2" in 2 years! [ € 1 trillion ]

  Europe/(China soon), is in a recession, and no amount of ECB bond buying is going increase demand. There is no way in hell that this money gets paid back, whether Yields are 3% or 6%! Everyone is going to get screwed. Even the ECB!

  Any private bond holders better load up on "clippers" for the "buzz cut" they are going to get!


Tue, 09/04/2012 - 14:19 | 2761230 Ghordius
Ghordius's picture

what? no faith in LTRO 3&4? two years is a looooong time

Tue, 09/04/2012 - 14:44 | 2761344 SafelyGraze
SafelyGraze's picture

"of course, we love drachma .. but I think it's gonna be ok for all of us"

Tue, 09/04/2012 - 14:47 | 2761354 youngandhealthy
youngandhealthy's picture

Tyler. This one was utterly naive. Nothing what you preditced (and have predicted when it comes to Spain and Italy) have materialized yet.

Whats wrong with you? U R a smart guy...why this armageddon hat on all the time? 


Do NOT follow this link or you will be banned from the site!