Here’s a perfect end to a week in which the ECB has apparently bashed peripheral bond markets into submission. Apparently.
Watch those bid-offer spreads.
We couldn’t quite believe this chart of the bid-offer spread on ten-year Spanish government bonds, made by Divyang Shah of IFR Markets, when we saw it. But it checks out, and is worrying (click to enlarge):
(Still not at the May 2010/Greek crisis nadir… yet.)
It would appear that in the bonds where the ECB has not so far bought in large amounts, liquidity is still highly frozen. Bonds that are now critical to market sentiment on core contagion, moreover.
Shah also makes this interesting point on whether market makers who receive ECB orders even actually have the bonds available by this point (emphasis and link ours):
Since Wednesday 10-year Portugal has come in from 454bps to 305bps while 10-year Ireland has come in from 697bps to 534bps. These moves are extraordinary and have been ascribed to a step up in ECB intervention whereby the suggestion is that the ECB may have done clips of 100mn as opposed to what has been a recent standard of 20-25mn…
But the risk is that what we have seen this week is simply an unwinding of price action that had gone parabolic on the back of illiquidity. Adding to the squeeze is the fact that those on the other side of the ECB intervention may not have had the right inventory on their books despite making a price to miss the ECB order. The ECB has tended to check for prices and not always dealt, so being given an order and not having the inventory is likely to have surprised many.
On the other hand, the ECB appears to be focused on buying up short-dated peripheral debt, Shah adds — such as the Portuguese five-year. Could someone be trying to fix those distorted yield curves?
Looking at the bid-offer spreads, we’d say there’s an interesting battle being fought in the Irish two-year, too:
Related links:
Euribor, or not putting the ‘E’ in Europe’s non-QE - FT Alphaville
Sovereign liquidity snapshots – FT Alphaville