Tag Archives: Basis point

Smart Money Is Not Stupid (Or Is It?)

The first week of January is often a positive one for risky assets as investors return from their holidays. The pattern looked like it was going to be repeated this week, when spreads tightened on Tuesday, the first full day of trading in 2011. But the credit markets went into reverse on Wednesday. Something doesn’t smell right. The Markit iTraxx SovX Western Europe index soared to a new record wide level of 220 bp’s by Friday’s close, and the peripheral names ended all at,  or near, unprecedented marks.

“It seems likely that there are real fundamental reasons why credit has underperformed this week.”

Gavan Nolan

The senior financials index  broke through 200 basis points on Friday as the investors adjusted to the new reality – that senior debt is no longer sacrosanct. Equities have become accustomed to being wiped out by bailouts, hence the paper had little impact on bank stocks, according to Markit Credit Research. The equity markets are still up on the week, though they have given back some gains Friday.


“It should be pointed out that haircuts under the proposal are a last resort and would not apply to existing bank debt currently in issue,” credit analyst Gavan Nolan at Markit writes in his weekly wrap-up.

But according to Nolan is it likely that this will create a split in the senior bank debt market between outstanding bonds and the new bail-in bonds if and when the plans are implemented. (Probably 2013-2014).

It could also raise the cost of senior unsecured bonds, possibly creating an incentive to issue more covered bonds.

Well, my guess is that the market participants is smelling a rat, and to me that is a sign that fundamentals still rules.  Even if it do not look like it does sometimes. Hopefully, the experienced traders are aware of the fact that a market can stay irrational longer than they can stay solvent.

And it might seem irrational that problems in private financial institutions at the moment, making new funding more difficult and more expensive,  is having a severe impact on the funding of national governments.

But it does.

Spreads in banks based in the euro zone’s periphery continue to hit record levels, particularly those institutions perceived to have weak capital bases, and the turmoil in the bank credit market had a “knock-on effect on sovereign spreads,” Nolan writes.

“Investors are aware that any bail-in mechanism won’t remove the systemic risk surrounding the banking industry, particularly in the near-term.”

You bet they are!

Nor does is seem rational that the stock market is going up while the credit market is going down.

But it does.

Gavan Nolan raises the question if it’s technical or fundamental factors that cause the credit/equity decoupling?

His answer is; probably a combination of both.

“Anecdotal evidence suggests that liquidity in the credit markets is somewhat thin, particularly in single names. Some investors may be deciding to sit out the volatility at this early state in the year, and dealers are reluctant to take on positions going into the weekend,” he writes.

But there has been considerable activity in the indices. (Click here for more details).

“It seems likely that there are real fundamental reasons why credit has underperformed this week,” Nolan concludes.

I’m not quite sure if that is a good thing or a bad thing – probably a combination of both…

Anyway – the perhaps most important publication of the week was the EU consultation paper on bank bailouts.

Newspaper reports emerged on Wednesday suggesting that the EU is planning a framework that will include the possibility of senior bank bondholders sharing the burden of future bailouts.

This led to the Markit iTraxx Senior Financials index threatening to breach the 200 bp’s level for the first time since June 2010.

“The EU paper duly appeared late on Thursday, and the predictable widening effect on spreads followed.”

The Markit iTraxx SovX Western Europe index soared to a new record wide level of 220 bp’s by Friday’s close, and the peripheral names were all at or near unprecedented marks.

But the banking burden isn’t the only force driving sovereign spreads wider:

  • Spain, Italy and Portugal are all due to tap the capital markets for funds next week, commencing what will be a busy period for government issuance.
  • Portugal’s 6-month T-bill auction earlier this week was less than impressive, with yields nearly double that of the previous auction in September.
  • The ECB has been buying Portuguese government debt for the first time this year, and it would be no surprise to see it continue its interventions next week.

Conclution: It seems like the Mr. Ben Bernanke‘s favorite expression “unusual uncertainty” will be valid for at least another year.


When it come to the co-called “smart money,” I did a Google picture search of the term.

The result was a disturbingly number of Paris Hilton photos.

Now, if that’s supposed to be an illustration of smart money, then God help us all!

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Filed under International Econnomic Politics, National Economic Politics, Technology

Mama Mia, We're All PIIGS Now!

The Markit iTraxx Europe hit 120 basis points for the first time since early July, the Markit SovX WE reached 209 bp’s, a new record. French CDS spreads closed above 100 for the first time, Belgium broke through 200 with Italian spreads rapidly closing in on the Spanish level around 300 bp’s.

“The sovereign debt contagion has spread beyond the eurozone’s periphery and into the club’s core.”

Gavan Nolan

Well, it seems like we’ve finally become PIIGS. all of us here in Europe. No matter how many bailouts, rescue packages and stabilizing mechanisms the political leaders come up with, the financial crisis just keeps on rolling. We’re approaching the end of 2010. The crisis have then lasted for more than two years, and it still seems like a beginning rather than an end.

“What little risk appetite is left in Europe appears to be dwindling as we head into year-end,” credit analyst Gavan Nolan writes in Tuesday’s Markit Intraday Alert.

“The sovereign debt contagion has spread beyond the euro zone’s periphery and into the club’s core,” he notes.

France and Belgium, both founder members of what is now the EU, saw their CDS levels reach unprecedented levels today as investors shied away from risk.

It might seem strange to talk of a AAA sovereign such as France as “risky”. But the French government was forced to quash rumours that the country could lose its stellar rating.

French budget minister Francois Baroin says that there is “no risk” and “no concern” about its rating. Finance minister Christine Lagarde says that France is among the “best risks in Europe”.

Now, I’m getting really tired of hearing all these “the-worst-is-over”-statements. Everyone knows it isn’t true.

I have presented this figure before, and I'll do it again

The French spreads are wider than all of the Markit iTraxx SovX Western Europe index constituents bar – the PIIGS.

Today was the first time French CDS has closed above 100 points.

Belgium also broke through a key barrier. The country’s spreads widened beyond 200 bp’s to a level usually associated with the peripherals.

“Indeed, some traders are placing it in the same group as Greece, Ireland, etc, or calling it “semi-core”. Its high debt levels and political instability have been a concern to some investors for some time,” Gavan Nolan writes.

Italy, another country that would regard itself as at the core of the EU (it was also a founder member), shares Belgium’s weaknesses.

Its spreads have widened sharply this week as the markets reassessed its credit standing.

High national debt and poor growth prospects are unattractive for most credit investors, and it is moving closer to its fellow peripherals. Not an easy achievement given that they hit new record wide today.

The Markit SovX WE reached 209 bp’s, a new record, before settling back later in the afternoon. This is the first time the index has gone beyond 200.

“The panic was not restricted to sovereigns. The corporate market was also infected by the concerns around government creditworthiness,” Nolan points out.

The Markit iTraxx Europe hit 120 bp’s for the first time since early July, driven by names based in the peripheral countries and France.

“Defensive names such EDF and GDF Suez widened due to their close relationship to the sovereign credit,” Nolan adds.

However, there was some improvement later in the day as the panic subsided.

“Spain’s auction on Thursday and the ECB announcement the same day will play a major role in shaping sentiment,” Gavan Nolan at Markit Credit Reasearch concludes.


  • Markit iTraxx Europe 116.5bp (+3), Markit iTraxx Crossover 520.5bp (+7.5)
  • Markit iTraxx SovX Western Europe 204bp (+7.5)
  • Markit iTraxx Senior Financials 172bp (+7)
  • Sovereigns – Greece 955bp (+3), Spain 369bp (+18), Portugal 555bp (+17), Italy 271bp (+26), Ireland 615bp (+3), Belgium 206bp (+25), France 107bp (+8)

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Filed under International Econnomic Politics, National Economic Politics

The Fear Is Still Out There

There’s a lot of things to be said about fear; fear in general and fear as a driving force in the financial markets. Some say the fear is the only driving force in the market – the fear of losing money and the fear of underperforming ones competitors. The first kind should restrain investors from taking too much risk, the other should (in theory) increase their risk appetite. In other words; fear amongst market participants is really a good thing. But the central banks have in reality more or less eliminated the risk element with its quantitative easing policy. So, why is fear still an issue?

“Spreads opened wider this morning, with Ireland and the threat of contagion across the euro zone’s periphery continuing to incite risk aversion.”

Gavan Nolan

The Markit iTraxx SovX Western Europe index hit 187 basis points, Wednesday, another all-time-wide, as investors are said to fear the contagion of debt problems from one country to another.  Credit markets recovered in the afternoon after a shaky start, but the ongoing peripheral concerns ensured that they underperformed their counterparts in equities.

CDS spreads opened wider Wednesday  morning, driven by Portugal and Spain, with Ireland and the threat of contagion across the euro zone’s periphery continuing to incite risk aversion, according to Markit Financial Information Service.

Ireland’s rating was downgraded two notches to A from AA- by S&P’s Tueasday evening, the agency citing the rising cost of bailing out the country’s banking system.

Ireland’s spreads have been trading in junk territory for some time but the downgrade only added to the negative sentiment, credit analyst Gavan Nolan at Markit Credit Research writes in Wednesday’s Intraday Alert.

The government’s “National Recovery Plan”, a four-year plan inflicting yet more austerity on the Irish people, was unveiled today. It amounts to a EUR15 billion fiscal tightening; EUR10 billion in spending cuts and EUR5 billion in tax hikes.

“But whatever the merits of this policy – and many doubt its efficacy and its optimistic growth assumptions – there is considerable uncertainty over whether it will be implemented at all. The government’s position is precarious and it will have difficulty getting the necessary votes to pass the December 7 budget,” Nolan points out.

The Irish CDS’ are now trading with spreads around 590 bp’s, similar to pre-bailout levels.

“Contagion was still the buzzword today and this was reflected in sovereign spreads this morning,” Markit’s analyst notes.

The Markit iTraxx SovX Western Europe index hit 187bp, an all-time record, driven by Portugal and Spain.

The Iberian countries are viewed by the markets as being the next most vulnerable to a debt crisis. However, they recovered later in the day, but remain at unpleasant high levels.

And financials continued to underperform amid sovereign volatility and concerns over burden sharing – or the possibility of being bailed in, instead of out.

I guess that’s where the real fear is…

Anglo Irish Bank’s debt exchange was deemed a restructuring credit event by the ISDA DC today, and a credit event auction will follow in the coming weeks.

“Risky assets enjoyed a stronger afternoon, helped by a plethora of economic data,” Gavan Nolan writes pointing to the US weekly jobless claims that came in better than expected, as did UofM consumer confidence.

New homes sales and durable goods figures were less impressive but investors were ready to put them aside ahead of Thursday’s US holiday.

“With US news likely to be minimal over the rest of the week, events in the euro zone should shape spread direction on probable low volumes,” Gavan Nolan concludes.

When it comes to fear in general, the wise men says it’s all in the mind, and that there’s nothing to fear but fear itself.

Obviously, most investors thinks that’s all just bull-shit.


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