Somehow the fact that the PIIGS can issue Bills (sub 1-year debt) in an environment in which both the ECB and the Fed have made any debt investment under 3 years risk free is taken as a positive sign. But in a continent starved for even the most optically irrelevant good news, this may be all it gets, which it did last night after Italy auctioned off €8 billion 182 bills at a 1.97% rate, the lowest since May. A far more relevant question is where peripheral debt with a maturity greater than 3 years, and thus with implicit risk, would price. But for now at least some of the banks appear to be dipping their toe into a very short-term carry trade, with ECB deposits declining from €484.1 billion to €464.8 billion overnight. Whether or not this is on the back of the assumption that a Greek default is contained remains to be seen: it would be truly laughable if Europe believes things are ok and thus underutilizes the next LTRO in one month only to find itself with a several trillion euro shortfall 3 weeks later. Yet this, being Europe, is the most likely outcome. Offsetting Bill issuance optimism is the ongoing uncertainty over the outcome of the Greek PSI talks, which for now at least have stalled with the cash coupon being the straw man sticking point. The truth is that if hedge funds want a default to proceed with international litigation arbitrage, that most lucrative of hedge fund strategies, they will get a default. Everything else is irrelevant. Below is Bloomberg's summary of how the newsflow is affecting markets.
EU sovereign yield spreads mostly tighter, USD lower, as Italy auctioned bills at lower yield, on mounting optimism regarding Greek debt deal, writes Bloomberg analyst TJ Marta in following note:
- Italy auctioned EUR8b 182-days bills at 1.97%, low since May
- EU’s Rehn: Greek agreement “very close”
- EU sovereign yield-to-bund spreads mostly tighter, with significant tightening for Italy, Spain, Belgium, and extreme tightening for Greek 2-yr
- USD lower vs all major FX, modestly vs most; down significantly vs yen, Indian rupee, which benefited from news of regional capital inflows
- Otherwise, markets mixed in modest ranges
- Major equity indexes mixed in mostly modest -0.1% to +1.0% ranges
- Commodities mixed in -0.3% to +0.7% ranges
- Treasury curve moderately steeper with yields mixed in moderate ranges