Risk Transfer Begins As EFSF Spreads Widen And Sovereigns/Banks Improve

Tyler Durden's picture

Expectations of a grand plan may be on hold for a little while as the reality sets in for traders and asset managers alike this morning. Despite EUR strength, back above and holding a 1.40 handle, risk assets in general are less excited. European credit indices are opening tighter, as we would expect with higher beta outperforming. XOver -32bps and SENFIN -16bps may seem impressive but there is little follow-through in the underlying credits with most of the major European financials at best 5bps tighter (and notably BARC and LLOYD are wider). Its also worth noting that the index compressions are generally highest in the indices that were the most liquid and specific hedges and had traded significantly above (wider than) their intrinsic fair-value. This skew compression is similar to what we saw Monday in HY and today in IG in the US although XOver is now significantly rich to fair-value trading inside of HY for the first time in two weeks.

SovX is tighter by 14bps while underlying single-name Western European sovereigns are generally tighter with PIIGS unsurprisingly outperforming (though we have seen very few runs on Greece yet leaving it unch - which makes sense given the uncertainty). CEEMEA sovereigns are wider though (even if the index is compressing) as hedge unwinds seem the raison d'etre of trading desks today. Most importantly, the yield of EFSF bonds is rising (as we discussed yesterday), with the 2021s breaking back below Par. This makes sense as the sovereign risks are transferred to the supra-national EFSF entity and concentration risks are increased. The yield of Bunds is also rising significantly, and of course most see this as simply a move out of safe assets, but it is just as fair to conceive the risk transfer aspect here also especially as Bunds underperform UST and trade in line with EFSF so far.

PIIGS CDS are outperforming their peers but the bond yields are not exactly tearing lower - though GGBs are benefiting, though ITA and FRA 10Y spreads to Bunds have now improved on net since the Oct 3rd US equity lows.

US TSY selling has halted with yields recovering lower from earlier evening highs. SOCGEN is already out claiming it needs no new capital from outside sources so perhaps it is done selling its USD assets and reptriating?

For now, as expected, liquid credit indices are improving, single-names are not as excited (probably liquidity as much as insight), sovereign CDS are compressing but bond yields not so much, and as EUR strengthens, EFSF credit risk is deteriorating as it soaks up all that risk transfer.

UPDATE: Chatter that they are in buying BTPs already as 10Y ITA bonds rise the most in six weeks.

Charts: Bloomberg

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winter is coming's picture

See Bullish... BuyBUy BUy... Start thinking puts in November

prophet's picture

confiscation, ownership, property rights, contract law, financial accounting

TGI is forming 

Western's picture

It could very well be the black swan mother headed this way... or yet another temporary fright before more hopium injections.


Though, it's unlikely that this market will be driven higher on squeezing shorts. He who sells first...

winter is coming's picture

Dont you know, Europe is saved... Politicians actually figured it out.

Western's picture

Oh, that's right. My mistake.

rocker's picture

Did you forget how to fix this stuff.  You don't need a bazooka.  You need a big Hill.

You climb to the top. Don't forget your can. Fill with hopium. Then kick real hard.  All fixed.

Don't worry about it hitting the bottom. Just make sure it is a "Big Hill".

                                                                                                      LMAO on what Hopium does to Drunk Bankers.

Sudden Debt's picture



Wouldn't it be great if everything could be fixed with bazooka's?

Did your car break down? WE'LL FIRE A BAZOOKA ON IT TO FIX IT!

Did your fuzes blow up in your house? BAZOOKA!!

Do you have tooth pain? BAZOOKA!!

Life would be so interesting :)


Belarus's picture

Sarkozy was due to speak to Chinese President Hu Jintao later Thursday. On Friday, the head of the EFSF, Klaus Regling, will travel to China, which has huge cash reserves, to detail the insurance plan.

They may have figured out to whom might help with larger than normal bond buying even in the face of sovereign downgrades...or hell, even bank recaps. If they have something up their sleeves with China, this can HAS been kicked for awhile. Markets at the very lest are kneejerking and will likely send the SPY up 20% for the year.  

qussl3's picture

Reaching some unusual extremes on the USD crosses.

Smells like an all out QE3 bet.

Bernanke better deliver.

winter is coming's picture

how could he not.... his masters demand it

qussl3's picture

He will be forced to eventually, but crude and brent say its crazy to do it now.

Especially with Twist still in force, the EZ glow and China rumor fest.

Elections are 2012, gotta save some bullets for next spring/summer.


malikai's picture

If Benocide had any balls he'd stop beating his wife and unleash the fury of buying $5T in 30 year notes yielding .25%.

Charlie_Day's picture

Portfolio Insurance :: Oct. 1987 as CDS being null and void :: __________

(Hint: it rhymes.)

qussl3's picture

Thinking about it more i think this may be slightly different.

1987 was about equities and the open market, in that panic there were no buyers of last resort.

The ECB seems to be willing to backstop the bond markets now, i'm not aware of the limits of the SMP program, but theorectically they have infinite firepower, but only if they monetize.

Its moral hazard of the highest order.


Charlie_Day's picture

True, true. But instead of no buyers of last resort what happens when they do monetize and there's no sellers of last resort? Every single holder of any bond in the EZ notices that the ECB is basically buying at any price to stabilize, and sells. It would be a cascade and the ECB would have forced it's hand at trying to catch a falling knife. Massive printing. Or they suck it up and start letting people fail. US has much the same problem with Fed and treasury just shuffling the debt between each other.

Another funny thing to think about is didn't MS say that it had no exposure to SocGen because it had been hedged elsewhere (OBS CDS?). Well if CDS proves to be meaningless because the authorities will never allow a "credit event" to trigger, that means their hedges are worthless and they have open exposure of more than their market cap. Once again counterparty risk rears it's ugly head. If you make a bet with AIG that AIG will go bankrupt, you're bound to lose.


qussl3's picture

My thoughts exactly about the CDS, there's going to be some unintended consequences when you arbitrarily make them functionally worthless overnight.

ECB will have to print, its a mathematical certainty, either that or the PIIGS or Germany leaves.

Maybe this has pushed it out a little but with France's AAA in question, this whole thing could blow open sooner than we think.

But even then there may be another can kick.


eurusdog's picture

I give it 1.25 months based on the matching law. The rest of the pigeons will be pecking the button for more money and their own credit relief soon!

AngryGerman's picture

hopium. nothing decided yet. financials did not agree to anything yet. will they accept 50% hc? don't think so.

no details workewd out, nth.

this is hopium at its best. peops trying hard to save a screwed up year, mutual assuring overoptimistic.

rally might well ct through years end, but once year results are in, down the drain.

btw, do we have any info on cap flows of european mutual funds? i always enjoy the us data, but its europe we should be watching now.

also expect private wealth to have massive outflows as investors will realize how much prof portfolio mgt is worth. rich will take whats left and drive up real estate and direct investments.

Tic tock's picture

..CDS my left toe, you realize the US, UK, Europe are now the most absolutely corrupt Governments in a long while. It may be time to start crowdsourcing a way to rescue the poor souls entrapped by the Vermin Ubermensch

HD's picture

Odd enough - one country didn't need a bailout...


Josephine29's picture

Amongst all the hype I spotted a good blog post which pinned down a clear flaw to anyone who can do their maths.

A Clear Flaw

The EFSF has no money and has to go and borrow it. So now it is going to leverage money it has not even borrowed yet! What if it has to pay a high rate of interest or finds itself unable to borrow then the whole pack of cards falls down but this time it falls down times four.

In terms of number crunching we are dividing Greek debt by two but multiplying the EFSF by four!



Western's picture

Why would people bet on massive QE stimulus when the haircuts are being accepted, and risk is apparently chugging along alright?


Honestly, my take on this is that the overall market mood HAS to accept (almost feel 'positive') about what is happening insofar as a recovery is coming along. There's no way a central banker can print in an environment (brent @ $112, sending that over the top would destroy oil as a vehicle for international trade) where things appear to be fixing themselves. In order to psychologically scare people into accepting print jobs is to reveal the deflationary crunch during the positive mood.


I don't really believe Goldman's gold $2000 by new year's bet. Fuck that, before December there will be another deflationary burp that will make the markets beg for printing.... again.

AngryGerman's picture

European markets up, but why?

1. Private participation in haircut is volutary. IIF will propose sth, but fin inst will not have to go along.

2. EFSF is not formalized yet. so noone has any idea how it will look like, noone really knows how much firepower it will have, noone really knows who will have to pay for that

3. Noone has any idea how the recap of banks will happen. until when. what will be the 9% calculated against?

4. greece is going down. no recover within the next couple years. econom yis down the drain

5. italy: dont even ask

6. spain: maybe, but economy is also down, unemployment really high (especially youth), so where should growth come from?

7. france and french banks: who knows. they dont even know

in my opinion where are nowhere further than yesterday morning. all that happened over night was on the table before, all that happen where loose agreements on how a solution could look like.

and given the past track record on how europe movesa long with decisions, i would not expect anything substantial before march 2011 earliest.

current market rally is nothing more than hopium to the extreme.

Dick Darlington's picture

UPDATE: Chatter that they are in buying BTPs already as 10Y ITA bonds rise the most in six weeks


So much for the Germany's demand that ECB must stop bond purchases. German foolish politicians voted for the enhanced EFSF and demanded ECB must stop SMP and all they got was MORE SMP-purchases and hit to their own creditworthiness. THE PEOPLE must be VERY pleased... ECB started to monetize first thing in the morning, flows reported in Italy and Spain.


AngryGerman's picture

sheep dont get it. but thats good, otherwise there wouldnt be lamb chops

alexan99's picture

May I ask for an explaination why the EUR was risiing when the credit risk of the ESFS was rising until the 24th of October and now where it is falling (for whatever reason) the EUR is still rising? And when Bunds are rising, doesn`t that point to an increase of break-up risk in the EUR-zone? Shouldn`t that be bad for the EUR if the credit risk of the lender of last resort increases?  

melanie's picture

This has been predicted by Goldman Sachs on Oct 6, and discussed here on ZH lateley also.

The reason is that French banks are selling everything what is USD denominated (incl. US Treasuries) + convert to Euro.


alexan99's picture

ok. And why would you sell your USD assets, if you have to convert them at a rather unfavourable rate because the USD has been so weak basically since the beginning of the EUR? Sorry for the probably stupid question but don`t they have any liquid EUR denoted assets to sell?  

alexan99's picture

ok. And why would you sell your USD assets, if you have to convert them at a rather unfavourable rate because the USD has been so weak basically since the beginning of the EUR? Sorry for the probably stupid question but don`t they have any liquid EUR denoted assets to sell?  

HD's picture

CNBC is having a collective orgasm... Kernan is going to have to change his pants.

spanish inquisition's picture

as hedge unwinds seem the raison d'etre of trading desks today

Reminded me of the Buzzcocks song http://www.youtube.com/watch?v=off7KPMsY_E