The whole we’ll taper soon, oh no, actually not yet behaviour from the Federal Reserve last summer had, as you would expect, an impact on the volume of US treasury trading.
But it didn’t last. JP Morgan reports that monthly trading volumes of $2tn in April rose to an average $2.7tn in May and June, then dwindled with overall volumes for the year actually down on 2012. What might surprise, however, is that the post crisis decline in volatility for Treasuries (and many other securities) has not been seen in German Bunds and Japanese sovereign debt. Read more
Ok, in combination with Alice Ross and James Mackintosh we did a very back of the envelope calculation comparing the S&P’s figure with that suggested by the SNB’s methodology (they did not give a figure). Read more
Reuters: 19-Sep-2012 10:41 - GERMANY SELLS 4.084 BLN EUROS IN TOP-UP OF 2-YEAR SCHATZ AV YIELD 0.06 PCT
That’s Germany selling 2yr paper at a POSITIVE yield for the first time since June, having got rid at zero-yield in August. Investors also bid 2.1 times the amount allotted, the most since January. Read more
It is impossible for all investors to be invested in safe assets all at the same time.
That’s because risk can never truly be eliminated. It can only be transferred or managed. The more people pour into “safe assets” at the expense of “risky assets”, the more they transfer risk into the original “safe asset”. Read more
‘Have you ever wondered why none of our Bund forecasts are definitive?,’ Nomura’s European rates strategist Desmond Supple asked clients on Tuesday.
If you thought the headlines were bearish… you haven’t seen the bank quant models (the ones which presumably can’t read headlines).
Looking at SocGen’s latest cross asset quant research, the picture painted on all signal fronts is increasingly coming across on the dire side: Read more
Zee 2, 5 and 10-year yieldz are still compressing…to fresh all-time lows.
That’s German bund futures, on Wednesday. Fresh record.
An excellent point from Don Smith at ICAP on Tuesday.
If you’ve looked at the eurozone FRA-OIS spread recently and wondered why it is so weirdly stable given that Grexit fears are hitting new extremes, there may be a very clear and technical explanation. One that could, as it turns out, be masking weightier problems in the money markets. Read more
Germany appears to have had a successful auction of six-month debt on Monday.
That said, there is a caveat. The auction for €3.9bn worth of paper achieved a bid-to-cover ratio of 1.8 versus a previous bid-to-cover of 3.8. The average yield was a negative 0.0122 per cent — a bit of an auction first. Read more
Not great, but definitely an improvement on the last German 10-year bund auction (table via Reuters):
State Street, the large US custodian bank, has cited new regulations including the “Volcker rule” for its decision to quit the UK and German government bond markets just three months after becoming an official dealer, says the FT. The Volcker rule bans US banks from proprietary trading – buying and selling for their own account. It contains an exemption for US Treasury securities but not foreign sovereign debt. Although market-making – buying and selling on behalf of clients – is permitted under the rule, bankers say worries that that activity will be deemed “prop” will hamper liquidity. State Street’s withdrawal is one of the first concrete signs that banks are preparing to walk away from European market-making businesses because of the new regulatory environment.
There are a growing number of voices suggesting that much of the Eurozone funding crisis could be simmered by addressing one of its most identifiable symptoms. The quality collateral crunch in the system.
As we’ve noted before, there are many reasons to think that the trend towards ‘quality’ collateralised funding is having as much of an impact on the valuation of bonds in both private and central bank funding markets, as the perception that European sovereigns might be insolvent. Read more
We’ve discussed why the ECB’s policy of applying different haircuts to eurozone government debt collateral may be adding to dysfunctions in the repo market.
It’s one reason why broadening the ECB’s list of accepted collateral to include lower-quality assets won’t make much of a difference on a policy scale. Read more
These two charts, courtesy of Icap’s Euro Repo Weekly, tell it all:
The ECB’s Mario Draghi gave a speech to the European Parliament on Thursday, making some of the following key points:
RTRS – DRAGHI-DOWNSIDE RISKS TO ECONOMIC OUTLOOK HAVE INCREASED
RTRS – DRAGHI-ECB TEMPORARY MEASURES ONLY LIMITED
RTRS – DRAGHI-ECB AWARE OF CONTINUING DIFFICULTIES ON BANKS
RTRS – DRAGHI-AWARE OF MATURITY MISMATCHES, STRESSES ON BANK FUNDING
RTRS – DRAGHI-CHANGES IN STRAINED COUNTRIES HAVE NOT YET HAD IMPACT ON FRAGILITY OF FINANCIAL MARKETS
RTRS – DRAGHI-CREDIBLE SIGNAL NEEDED TO GIVE ULTIMATE ASSURANCE OVER THE SHORT TERM Read more
Readers take note. This is a chart of the one-year German note, currently yielding less than zero. An unprecedented event according to Reuters:
After a splurge in September, overseas investors scooped up a more gilts in October, according to figures released by the Bank of England on Tuesday.
First we had the ‘credit crunch’. Now some warn what Europe might in fact be experiencing is better described as a ‘collateral crunch’.
Ever since banks turned to the secured collateral markets known as ‘repo’ for their funding needs, especially over longer durations, quality collateral has become the most sought over security in town. So much so, in fact, that some quality collateral is hardly circulating. Getting your hands on it, meanwhile, can make the difference between being able to fund in the public market or having to turn to the ECB. Read more
Icap’s weekly European repo report shines some light on recent eurozone bond developments.
For example, it blames illiquidity in German bond markets for causing chaos in the asset class rather than a sudden change in mindset. The illiquidity, it says, is specifically related to the perceived virtue of the asset (everyone wants to buy the bonds outright) rather than a sudden rush for the exit. Read more
Named after the economist Hyman Minsky, the phrase describes a situation where investors who have borrowed too much are forced to sell even good assets to pay back their loans.
The scale of deleveraging flows is perhaps best demonstrated by the recent surge in T-bill yields in the eurozone (Figure 1). T-bills are traditionally considered the safest of safe assets. However, if financial institutions need to be wary of the size of their T-bill holdings, then clearly this has implications for their desire to increase balance sheet exposure to more “risky” assets such as loans or credit products… Read more
At first sight, this looks mad. Lending to the UK government, in charge of the clapped-out British economy, now returns less than lending to Europe’s most successful country. Worse still, the yields on gilts are measured in sterling, a chronically weak currency, so not only does your money earn less, you’ll be repaid in something which history says will have been devalued by the time you get it back. Oh, and by the way, inflation is 3 per cent above the yield, making the internal devaluation painful, too.
Something is seriously awry here, and two events this week offer clues to why German government 10-year paper yields more than the equivalent UK stock. On Wednesday the markets were spooked by the failure of an auction of 10-year German debt. Those in this arcane world struggled to understand what it meant, so there’s little hope for the rest of us. It’s either bad news, or very bad news, probably depending on whether you’re short of German bonds. Read more
For the first time, investors and bankers this week are asking the question: could the eurozone debt crisis spread all the way to Berlin, reports the FT. Such a scenario, unthinkable not so long ago, would have enormous ramifications for global financial markets. It could jeopardise the German bond market’s historical status as one of the world’s havens, a place of safety for investors wanting to preserve their capital. The trigger for these fears was what investors are calling a “failed” auction of German government debt on Wednesday, in which the Bundesbank, the country’s central bank, had to step in to buy unwanted Bunds. Demand at these auctions can vary and lacklustre take-up is not uncommon. This time, though, was different. Investors shunned the bonds. The poor take-up may have been due to the recent sharp rally in the prices of Bunds, which has driven yields to historic lows, making returns less and less attractive. But there is more. The intensifying crisis in Europe has frightened managers of “real money” – not just hedge funds, but pension fund managers and insurers – to the extent many have been shifting money out of peripheral European debt and are considering exiting Europe altogether. Those concerns have already hit French debt. Germany’s could be next.
Understanding repo markets is not easy. It’s a complex and very opaque market.
But there are some developments in Europe, which are worth following. One of them is the ‘specialness’ of German bonds being used for collateral funding — reflected by falling General Collateral rates — versus rising rates for other European debt markets. A symptom, possibly, of the ECB’s failure to monopolise the European money markets. Read more
Germany’s technically uncovered 10-year bund auction has stirred much debate.
To us, the mystery is the inconsistency. How do you reconcile low auction demand, with supposedly high demand for haven assets like bunds and the low or “special” repo rates in the German bond collateral market. Read more
Thursday early price action:
The failed German Bund auction on Wednesday dampened sentiment in Asian stock markets on Thursday, particularly in Japan where the Nikkei 225 in the morning hit its lowest level since April 2009, reports the FT. However most other Asian markets reversed morning losses and were slightly higher in the afternoon, with one strategist telling the WSJ that a combination of seller exhaustion and bargain-hunting may be responsible. Dissection of the bund auction continued, with some market participants saying the historically low yields — 1.98 per cent — may have put off some buyers, says the FT. German debt started to trade like a risk asset with Bund yields rising roughly in line with French, Italian, Spanish and Belgian yields — however yields on short-term German debt actually went into negative territory. A Bloomberg report says Japanese investors were the biggest unloaders of bunds in September, and money managers there are preferring gilts as a safe haven. Meanwhile, Angela Merkel and Nicolas Sarkozy will voice their support for Italy’s new prime minister Mario Monti at a tripartite meeting on Thursday, says Reuters. The French and German leaders are holding talks with Mr Monti in Strasbourg to discuss Italian economic reforms. Mr Sarkozy will continue to argue for ECB intervention at the summit, says the FT.
Something strange is up in the world of ‘General Collateral’. And since eurozone funding markets are increasingly dependent on collateralised rather than unsecured loans, these are important developments that could be influencing rates elsewhere.
Nothing tells the story better than these charts, courtesy of Icap — a key repo market broker. What they pinpoint is a seemingly diverging attitude towards the various bond markets that make up so-called general collateral (GC) in the Eurozone, as far back as July this year: Read more
Just when you thought it couldn’t get any worse… Jean-Claude Juncker, Luxembourg Prime Minister and president of the EuroGroup speaks:
Nov. 16 (Bloomberg) — Germany’s debt level is a “cause for concern,” Luxemburg Prime Minister Jean-Claude Juncker told the General-Anzeiger newspaper. “Germany has a higher debt than Spain,” Juncker was quoted as telling the Bonn-based newspaper in an interview to be published tomorrow. “The only thing is that no one here wants to know about that.” While Greece is on the right path to consolidate its budget, it’s not yet time to “see light at the end of the tunnel,” Juncker was cited as saying. If Greece were to leave the euro, it would create a “disastrous scenario,” he said. Read more
At some point on Wednesday, eurozone governments will say they want banks to find an unspecified amount capital, based on revised sovereign haircuts which… we still don’t know a lot about.
We know that sovereign bond positions will be marked down, or up, according to market values. (When the values will be taken, we don’t know either. Imagine marking five-year Italian debt at dates before and after this summer’s ECB intervention, for example.) We know at the very least that this all fits into a 9 per cent core tier one capital ratio target. Read more