Successful Auctions And Chinese Buying

Tyler Durden's picture

From Peter Tchir of TF Market Advisors

How many times can we rally on the same story.  Back in April of this year, there were big stories about Chinese buying European sovereign debt.  At the time the Greek 10 year bond was trading at almost 60 then.  It is below 40 now.  The Greek 2 year bond was at almost 70, now it too is at 40.  The Italian 5 year bond yielded less than 4%, today it is almost back to its highs of 5.5%.

I am quite positive that I can find articles quoting Chinese support for Greece going back to March 2010 when Greece issued a new bond in what was deemed a VERY SUCCESSFUL auction.  I have written about it before, but it seems worth mentioning again.  In March 2010, Greece issued a 5 billion EUR 10 year bond.  It had a 6.25% coupon and was priced at 98.942    It traded up and the whole market breathed a sigh of relief that the auction had gone so well. 

It is hard to count the number of times that China has come in to buy European bonds or that a successful auction was a sign that the crisis was over, I only have so many fingers and toes after all.

None of those actions was enough to save Greece from some from trading at prices far below what investors a year ago thought were conservative recovery rates.  And Greece only has about 330 billion EUR of debt. 

How is China going to save Italy with 1.6 TRILLION EUR of debt?  It doesn't  seem logical to expect ploys that couldn't protect a much smaller country to work on one with even more debt.  China could buy up all the  156 billion EUR of Portuguese debt if it wanted to solve the "contagion" there.  They haven't done it. China may need to diversify away from US Treasuries, and it is prudent for them to do that, and some of that money can even go into weaker European bonds, but are they really prepared to invest in a meaningful way? 

Again, if this was new news, or had shown any sign of working in the past, I would be more excited.  This seems like a story that is trotted out every few months, provides an initial pop, and then bonds return to their grind lower in price. 

I am more curious by the choice of Italy to sell 1.2 billion of 4% 9 year bonds at a price of 90.2.   I will admit that I don't follow Italian bond auctions that much, but Sept 2020 seems a slightly weird maturity.  A 10 point discount sounds like something a junk rated issuer does, not a sovereign. In fact, a 10 point discount on a 10 year bond may even raise original issue discount tax problems if it was done in the US.  It seems weird, though it does seem a good fit for anyone who bought 10 year Italian CDS last September when EFSF was initially announced and Ireland and Portugal had been allegedly saved.  In fact the discounts that the new issues were done at seem to have the most use for CDS traders.  It makes the basis package more attractive.  Insurance companies and other "cash" investors tend to prefer higher coupons and more current income.  CDS and basis traders prefer the convexity of lower prices.  I wonder how much of this auction went to cover CDS short positions?  I suspect a lot, and the low coupon/low issuance price supports that view.

One thing I struggle with more and more by the day is how there can be so many stories of individual Chinese company fraud, so many stories of ghost towns, yet complete faith in the nation as a whole?  It seems to me that a country that has allowed so much fraud to perpetuate at an individual level, may not be as "truthful" at a group level.  The fact that investors have been willing to overlook fraud after fraud at the individual company level doesn't give me much faith we would spot it at the country level.  For now, I am still willing to take the Chinese data and stories without too much of a grain of salt, but it is becoming harder to rationalize the frauds as just a few bad apples and not a sign of much deeper corruption.

Anyways, I guess its time to go buy stocks since if China doesn't give enough money to Italy to make a dent, then we will rally on Merkel or someone saying Greece won't default, in spite of all the evidence to the contrary, or if worse comes to worse, the NYSE will just change their hours so they open as Europe closes for a half hour trading session, and then re-open for another session from 3:30 - 4:00.  That would pretty much ensure S&P 1500 in a matter of weeks!

In the meantime, back in the real world we all need to deal with the fact that once again the S&P futures have traded in a 2% range overnight.  Let the fun begin.


China Open to Buying More Bonds of Indebted Euro-Area Countries
2011-04-21 12:28:03.994 GMT

By Jonathan Stearns

April 21 (Bloomberg) -- China is open to buying more bonds of indebted euro-area nations as part of a strategy to bolster the European Union economy and diversify away from investments in U.S. debt, said the Chinese ambassador to the EU.

Song Zhe said China owns “several billion euros” of bonds sold by Greece and Portugal and might embark on another round of purchases of sovereign debt in the euro area.

“In the next step, it is possible we will purchase more sovereign debt” in Europe, Song told reporters today in Brussels. “We hope to see financial stability and sustained economic growth in the euro zone.”

Song said China believes the EU can overcome the euro area’s debt crisis, which was triggered by Greece last year and has since engulfed Ireland and Portugal. With the International Monetary Fund, the EU organized a 110 billion-euro rescue of Greece last May and an 85 billion-euro bailout of Ireland in November and is now preparing 80 billion euros in emergency aid for Portugal.

The fundamental aim of Chinese investments in Europe is to protect China’s “huge” foreign-exchange reserves, according to Song. “We do have confidence in the currency and it will remain one of our choices for investment.”

China’s foreign-exchange reserves jumped to a world-record $3 trillion in March.

China is in discussions to invest in the restructuring of Spain’s savings banks, Foreign Ministry spokesman Hong Lei  said today, after a four-day visit by Spanish Prime Minister Jose Luis Rodriguez Zapatero to Asia.

China already holds 25 billion euros of Spanish sovereign debt, up from 6 billion euros in 2009, Zapatero said on April 15 at the end of his Asian tour. That’s equivalent to 12.5 percent of the Spanish debt in foreign hands, he told reporters.

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GeneMarchbanks's picture

Rumors go hand-in-hand with FIAT, both are theoretically infinite.

So now we have a gossip fueled market, CNBC might be even more powerful than the Bernank. Great.

bania's picture

Regression to the Truth

Tense INDIAN's picture

dont think more than HALF day rally and then slump again

DeadFred's picture

Yet the rumor has to be considered a success. Look at how much money some people made yesterday and the end of the world (to them) was delayed maybe up to a day. The one who planted the rumor is very happy.

GIANTKILR's picture

It's like a bad horror flick, "THE ECONOMY THAT WOULDN'T" DIE!!!!"

deflator's picture

 This should be very bearish news considering China needs Europe to be on board with the move against the dollar as WRC. Consumption of critical commodities will not drop significantly with a failed Europe in order for China to maintain growth in energy consumption. The U.S. has lots of capacity to reduce energy consumption through conservation, smaller, fewer cars, etc. 

snowball777's picture

What happened to "this can be fixed", Peter? Surely China can help out with those interbank dollar funding woes...or did they forget where those hundreds of billions in reserves were stashed? LOL

China is waiting until they are well and truly over the proverbial barrel (but before the other proverbial barrel is over the falls) so they can negotiate for some of that port and italian gold.


LongSoupLine's picture

This is a time of govt and media intervention (read: lies, disinformation, manipulation, fabrication) that would bring a tear of shear joy to Joseph Goebbels face.  He would be so very proud of America and how its government and associated puppet/shill media has adopted and improved upon his methodologies of corrupt propaganda.

msmith's picture

The US Treasuries still seem to be the safe have choice and will likely remain that way for several more months.

msmith's picture

When will the Chinese come in at support gold.

BigJim's picture

I wonder if China is leaking this disinfo to prevent gold skyrocketting... so it can continue to get its hands on physical cheaply...

BigJim's picture

Having said that - maybe they really are dumb enough to buy all this toxic crap - they are a bunch of central planning bureaucrats, after all.

thunderchief's picture

I would not count on the Chinese to come to the rescue anywhere in the world where there is trouble.  No foriegn aid, no handouts, they would not even start a war for fear of the costs of rebuilding a mess after a conflict.  You can count them out when it comes to anything bordering on altruism. 

They like one way deals.  The dollar peg and US trade with china is that.  Their dealings in Africa are a one way bad deal for the whole continent, getting cheap fall apart infastructure for hard assets.  That continent will wake up one day to the mother of all African Rape jobs.  You think the colonialists were bad? you ain't seen nothing yet Africa.

So no suprise the Chinese are lackluster when it comes to Europe.  I am sure they want collateral for any bond buying and another one way deal.  The Chinese buy up everything for themselves, as the "One China" policy is all about being number one and that extends from the top of government down to little one child only Emporers.  They are creating a new definition for the word greed.

So I would not count on them to invest capital in USA infastructure, Europe (unless it comes with ownership of many things), places like Dubai which need new investment capital, or any place else hard hit economies.  Any Chinese in Haiti, Darfur, Afghanistan?  Na.  No money in those places.

BigJim's picture

And this differs from us how, exactly? You think our foreign 'aid' (that just entrenches existing corrupt and failing power structures) comes without rope-sized strings attached?

thunderchief's picture

Yes and the USA is just as bad.  But at least the USA actively blows hundreds of billions on futile adventures around the world and is activley hated for such adventures.  The Chinese get off scott free for their mis-dealings.

Here is one for you.  Who is sending food to North Korea these days?  The Chinese?  The mentors and chearleaders of such psychotic regimes.  The same Chinese that brought you Pol Pot and the Khmer Rouge in Cambodia.  No.  The USA is now sending food to starving North Koreans.  

And soon enough the RMB will be the world reserve currency, with China's own genocidal mandiac as the face of 21st century global trade.  It seems fitting.

Hman's picture

The financial system has been short circuted since 2008, bond purchases are all a scam ECB and the FED pay forign bankers to buy bonds to keep the system a float.. they need to kill a few to make you belive it's a real war.  Greek looks like a good target... Bitchez

BigJim's picture

I wonder how many of these Luxembourg and Cayman Island 'trusts' are just fronts for The Fed.

There's a reason they resist a full audit.

Everybodys All American's picture

An even more important problem is that when China buys any country's debt other than our own it creates the potential short fall of buyers for our debt.

supermaxedout's picture

Of course is China buying Italian bonds. Maybe they do not like the Greek bonds anymore! So Greece has to default because there is no potential buyer left (under the prerequisite that the ECB is not doing the same as the Fed does - limitless monetizing of debt ).

So Greece is  defaulting. That is a huge relief for the Greek people. The will get rid of the bulk of their debts while still enjoying a stable and trusted currency. There is no better solution for Greece. Now they only have to find a way to manage their economic future.  This is their problem. They dont have a problem with their currency. Greeks problem are corruption, excessive military expenses, their non functioning pro-forma democraty and so on. Greek is more an oligarchy having in mind that the goverment during the last 50 years was  in the hands of 2 or 3 families.  Now they have a clean sheet and they can try out if they are able to arrive in modern days.


China stops buying Greek bonds so does evrybody else. This is forcing Greece to live within its means.  That is a reality which all countries sooner or later have to face. So Greek is in advantage because they can still expect some help from the ones not yet bankrupt. Greeks are clever.

So what bonds will China buy in the future.

Italian bonds - still an accceptable choice. Berlusconi tries to have a balanced budget within the next few years. So there is at least a good will recognizable that Italy does not plan to produce a strategic default.

The same accounts for some other Euroland countries. Spain has just altered its constitution in order to reach a balanced budget in the near future. This is well comparable with Italy.

Why should the Euro be affected by the present situation. I dont know? The Euro only gets a problem when the ECB starts to monetize like the Fed. But I do not see this in the moment.

Banks will have problems now because of the Greek default. This is the problem but not the currency.  Europe has to make the choice whether to sacrifice their currency or let the banking system go bust. It looks like the banks lost. But this is not yet sure. maybe the Money funds are going to open the tap for the French banks again before they are blowing up. This is my bet, because the default of the French banks could pull down other big European and US banks. But this a problem of other banks and not the problem of the Euro currency.


myne's picture

"I only have so many fingers and toes after all." 

Randon fact: using binary, you can count to 1023 on just your fingers. Over a million if you use your toes too :p

spanish inquisition's picture

I don't see any changes in China buying debt as long as gold is being supressed and they can BTFD.

Dingleberry's picture


AldoHux_IV's picture

China has a lot of issues of its own to deal with-- like fixing their own economy and to be messig around proppig up unsustainable situations will only create more problems for China down the road.

Of curse the bigger point being that these kind of bailouts don't fix the probkem but only make it more frequent and bigger in size can not be ignored forever even in this centrally planned/manipulated ill fated market.

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