A Quick Reminder On The Effectiveness Of The ECB's Bond Buying

Tyler Durden's picture

Given the anticipation that is now built-in for next week's ECB meeting, we hope that Draghi has a little more up his sleeve than reviving the Treaty-testing, bondholder-subordinating SMP. Presented with little comment is the market's reaction during the last two periods of buying as it seems that Italian and Spanish bondholders are more than happy to know that there will always be a buyer no matter how much they keep selling their exposure down.

Lower pane is the weekly purchases of bonds by the ECB and the upper pane is the now all-important spread between Italian and Spanish bonds and the German Bund - higher being more risky.


Well that plan didn't work so well eh? It would appear that during the 2010 period spreads doubled from 100bps to 200bps and once again during the 2011 period, spreads almost doubled from 260bps to over 500bps in Spain.


From Goldman:

A reactivation of the SMP would be one possibility to change, at least temporarily, market sentiment. ...can be implemented rapidly and the chances of this happening have increased after Mr Draghi’s comments today. The reference of Mr Draghi to the malfunctioning monetary policy transmission mechanism could be seen as a preference for a re-activation of the SMP. However, it is noteworthy that a damaged transmission mechanism has been the justification for all non-standard measures the ECB has taken.


and for an interesting anology, here is Morgan Stanley's comparison of dealer inventory (liquidity) relative to high yield bond yields. As the inventories are sold down (in the case of the ECB, as they buy more and more and remove those bonds from the market) then the high yield bond market (think sovereign bonds in Europe) will 'adjust' to the new liquidity regime (i.e. reprice considerably lower - higher in yield)...


Chart: Bloomberg

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_ConanTheLibertarian_'s picture

The friggin' dead cat keeps on bouncing...

withnmeans's picture

"Rigged on"

"Rigged off"


You can't tell me that there is no insider Government and Big Bank trading going on here, it is to siphon the money off of the little guys.

They need to do away with the markets "Period". Invest locally, stay out of their way... 

Let them devour each other, left them leave nothing but bones.

101 years and counting's picture

the only question that truly matters: does Merkel get back before or after the ECB meeting next week?

RobotTrader's picture

Never before in world history has "Gum Flapping" had so much power.


Heh, might as well park Bernanke and Draghi up on the platform at the NYSE where they ring the bell and give them bullhorns so they can yell to the crowd:

"Risk On!" when equities get too low, or

"Risk Off!" when commodity prices get too high.


How easy is that?  LOL......


ZippyBananaPants's picture

This newly created "risk on, risk off" crap is just the way of the industry putting it out there that when you get your ass handed to you, as in 2008-09, we told you there was 'risk'.  CYA.


SilverTree's picture

Who said "let there be light"?

slaughterer's picture

I bet you all this "Gum Flapping" isn't strong enough to restore NFLX to $300 or ZNGA to $15.  

not fat not stupid's picture

please make it stop. i want my market back.

slaughterer's picture

Difficult to see any type of sell-off now with the twin CB meetings next week.

Biderman picked a very bad moment to go 100% short.  

Jlmadyson's picture

Oh the ole coordinated action. Hadn't seen that before.

Should fix all things right. I guess that is why we have coordinated action AGAIN.

bank guy in Brussels's picture

It's true that Draghi's remarks sound like the same bullsh*t as before

But This Time Is Different, ha!

Seriously, EU - ECB leadership knows the whole game is cooked unless they do something different

People in Brussels are reading Ambrose Evans-Pritchard ... I have been talking personally with people in the EU financial area about his articles ... Evans-Pritchard quite captured the sense of urgency, and also a viable plan, which has finally percolated up to Draghi and the EU leaders

Banking licence for the new EU mechanisms, bond-buying and a sinking redemption fund, on deck, like Evans-Pritchard suggests

Germans will drag their feet but will go along rather than let the German banks blow up from GIIPS debt disaster vulnerabilities


Bennie Noakes's picture

So the same idiots who engineered this crisis to begin with have now begun to dimly realize that there is a problem and are hard at work on a solution?

Stop worrying everyone! What could go wrong?

madcows's picture

Remember, the traders make all their money on the days before Central bank pillow flouffing is announced.

Just throw your dollars at whatever Eurostock 2 days before the meeting, and pull it out the morning of the announcement.  Shazaam! Extremely effective.

slaughterer's picture

Hard to fathom that we go into next week with two resounding ambiguous performative phrases:

"Whatever it takes"

"Get to work, Chairman"

SheepDog-One's picture

220....221....whatever it takes!

StychoKiller's picture

Hmm, are those Volts or Joules you're in favor of?

Jannn's picture


The Effectiveness? The ECB bought at least a few months!


Jannn's picture


The Effectiveness? The ECB bought at least a few months!


Nobody For President's picture

It will all be fine until Chancellor Frau Merkel gets back from vacation.

Cangoroo's picture

That is good news for the Euro. It would allow the ECB to puchase bonds in a selective manner but maintain certain country risk premiums. I think Germany and Germans will learn to live with it. There was a certain article in the Faz newspaper which calmed down the nerves of the economic community in Germany. As long as country risk premiums persist it is a good move to adopt a flexible interest strategy. There will be no bazooka but instead a floating band of interest rates supervised by the ECB.   

brace_brace_brace's picture

They should stop beating the dead horse, it wont run. 


Greek Budget Talks Stumble As Citigroup Sees Euro Exit At 90%

Cangoroo's picture

If Greece benefits from the new strategy remains to be seen, but it is a smart move abolishing the one size fits all approach. And the ECB will not be that stupid to announce a cap on bond purchases, because caps do not work.

q99x2's picture

A rumor etf should be established so it doesn't effect the rest of the markets otherwise a rumor from out of the upper sewer hole of a technocrat is inside trading.

Fecklesslackey's picture

The Europeans are sure giving us plenty of opportunity to short ES and EC at great prices.

Cangoroo's picture

Try to short a flexible currency system, Soros won the gamble, but it was close and sometimes history does not repeat itself. What Draghi wanted to state and it was clear, the ECB is no pussycat any longer. But for shorts there will be still plenty of opportunities in the equity markets. Pain is not over. 

hedgehog9999's picture

Watch the dump overnight!!!

GOLD and SILVER barely moved given Draghi's Lips Dartzuka. The second half of the day was a painful move up.

I am sure they'll blame the dump on FACEPLANT.



asteroids's picture

How many people in Europe are on welfare and their equivalent of foodstamps? Will super Mario fix their housing markets or generate jobs? And who really benefits if he starts printing. Yah, that's what I thought.