We have been rather vociferous in our table-pounding that even if a Greek PSI deal is achieved (in reality as opposed to what is claimed by headlines only to fall apart a month later), then Greece remains mired in an unsustainable situation that will likely mean further restructuring in the future. JPMorgan's Michael Cembalest agrees and notes that Debt/GDP will remain well above 100% post-deal but is more concerned at the implications (just as we noted earlier in the week) of the process itself including ECB preferred credit status, retroactive CACs (law changes), and CDS trigger aversions. In his words, the debt exchange is a bit of a farce and we reiterate our note from a few days ago - if this deal is so close, why is the 1Y GGB (AUG 2012) price trading -8.75% at EUR 28.75 (or 466% yield) and while longer-dated prices are rallying (maybe bear flattener unwinds), the moves are de minimus (-17bps today on a yield of 3353bps?) as selling pressure is clearly in the short-end not being rolled into the long-end as some surmise.
The slippery slope of lower volume continued today in the NYSE (cash/stock trading markets) despite ES (the e-mini S&P futures market) seeing its 2nd highest volume since 12/16 as that futures market has only seen 1 day of the last 11 with a negative close-to-close change. Driven seemingly by yet another rumor that the Greek PSI deal is close (yet GGBs are lower?), risk assets broadly went into overdrive and while ES held 1300 (on very large average trade size and volume as broke that stop-heavy level), the shifts in commodities, FX, and Treasuiries all helped sustain the euphoria into the close where we stabilized at yesterday's pre-market highs. Copper, Silver, Gold, EURUSD (and all FX majors aside from JPY), Treasury yields (and 2s10s30s) all closed at their highs of the day and while oil dropped early (around the Keytsone news?) it also limped back higher to $101 by the close. Equity markets were slight leaders on the day but credit caught up into the close. We do note that while the high-yield credit index has rallied dramatically but worry that the optical compression of spreads (bullish) is hiding the bear flattener in 3s5s that is seemingly dominating flow for now (relative to underlying credit).
Morgan Stanley's Jim Caron Apologizes For Wrong Call On Bonds, In 180 Degree Move Now Recommends A 10s30s FlattenerSubmitted by Tyler Durden on 08/20/2010 15:37 -0400
One of the biggest economic bulls, and correspondingly bond bears, of the past year, has been Morgan Stanley's Jim Caron, whose earlier estimate of a 5.5% in the 10 Year has cost many a bond investor much money. Today, Caron appeared on Bloomberg Radio with Tom Keene, apologizing for his call, and following up on his latest release in the MS Interest Rate Strategist, which started off: "We got our rates call wrong and missed a great opportunity to be long bonds this year. The market is currently rife with tactical relative value opportunities and that’s what we will focus on going forward. We’re shifting gears and will become more tactical, playing for rate moves in either direction in shorter timeframes, rather than having our ideas hinge on longer-term macro themes." Indeed, relative value, in the form of various divergence and convergence trades, is where it is at, and where Zero Hedge has been focusing over the past year.