Tag Archives: Government bond

Finally, Trichet Show Some Fire Power

As expected, the ECB had a pivotal role in determining spreads direction today. However, it didn’t turn out quite as smooth as the market was expecting. The  surprise followed soon after Jean-Claude Trichet‘s  press conference.

“It soon became clear that central banks were aggressively buying bonds, bringing to mind Trichet’s recent warning not to underestimate the ECB.”

Gavan Nolan


ECB president Jean-Claude Trichet did confirm that the ECB would delay its exit from its non-standard liquidity measures;  the three-month LTROs would remain in place until at least Q1 2011 and the other MROs until at least April 2011. This was welcomed by the markets, but it would have been a major surprise if wasn’t announced. The real surprise followed soon after the press conference.

The first reaction to Jean Claude Trichet‘s press conference was one of disappointment after the ECB president failed to provide a firm indication that the central bank was to step up bond purchases.

But soon it became clear that central banks were aggressively buying bonds, “bringing to mind Trichet’s recent warning not to underestimate the ECB,” credit analyst Gavan Nolan writes in Thursday’s Markit Intraday Alert.

“Portugal and Ireland government bonds were the main focus of the buying, with reports of some purchasing of Greek bonds also in circulation.” Nolan points out.

And the actions of the ECB caused the Markit iTraxx SovX Western Europe to whipsaw violently in a frenzy trading session.

The index was as tight as 182 basis points this morning, before widening sharply to 190 bp’s in the immediate aftermath of Trichet’s words.

Then rallied sharply to 180 bp’s when the scale of ECB bond buying became apparent.

“The rally in banks was even more emphatic, with the Markit iTraxx Senior Financials index reaching 145 bp’s, some 17 bp’s tighter than yesterday’s close,” Nolan reports.

Iberian banks, which have underperformance of late, were among the strongest tightening credits. This pulled the Markit iTraxx Europe tighter in a corporate market where only a few defensive names widened.

“The focus will now turn to tomorrow’s economic data, with non-farm payrolls, Markit PMIs and ISM Services,” Nolan concludes.

Adding: “But the ECB’s actions haven’t solved the sovereign debt problems, and some investors will already be wondering when the issue of solvency, rather than liquidity, will be addressed.”

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  • Markit iTraxx Europe 106.5bp (-6.5), Markit iTraxx Crossover 473.5bp (-30)
  • Markit iTraxx SovX Western Europe 180bp (-11)
  • Markit iTraxx Senior Financials 145bp (-17)
  • Sovereigns – Greece 885bp (-43), Spain 290bp (-26), Portugal 450bp (-32), Italy 214bp (-16), Ireland 550bp (-20), Belgium 182bp (-10), France 92bp (-4)

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Ireland And Portugal Close To Collapse

Portugal only managed to sell EUR 750 million in bonds at yesterdays auction – at the bottom of its indicative range – and, like Ireland, was forced to pay much higher yields than its previous auctions. The Irish CDS spread reached its highest level since March 2009.

“It is becoming clear that Ireland and Portugal are perceived by investors as the most vulnerable to a Greece-style collapse in confidence.”

Gavan Nolan


Credit underperformed equity yesterday in another session dominated by sovereigns. After the Irish government‘s bond auction on Tuesday – deemed a success at the time – Portugal followed up on Wednesday with its own debt sale.

Again, the consensus was that the auction was a strong one, with the sovereign achieving high bid-to cover ratios of 3.5 (2014 bond) and 4.9 (2020 bond).

But it only managed to sell EUR750 million – at the bottom of its indicative range – and, like Ireland, was forced to pay much higher yields than its previous auctions.

Portugal did see some modest tightening in its CDS spreads but this proved just as ephemeral as Ireland’s rally the day before.

Both countries were significantly wider by the close and Ireland hit a record wide of 465 basis points.

Greece continued to outperform and Spain’s spreads held up relatively well, according to the daily update from Markit Financial Information Service.

“It is becoming clear that Ireland and Portugal are perceived by investors as the most vulnerable to a Greece-style collapse in confidence,” vice president at Markit Credit Research, Gavan Nolan, writes.

Spilling Into The Banking Sector

The weakness of the sovereign has spilled over into the country’s banking sector.

“Perhaps in Ireland’s case the causality should be reversed. Either way, the banks’ spreads have hit their widest levels since March 2009,” Nolan points out.

Banks were underperforming across the European CDS market, with the Markit iTraxx Senior Financials index 8.5bp wider at 145.5bp.

It should be noted that liquidity does vary among banks.

Irish banks AIB and Bank of Ireland, for example, have Markit Liquidity Scores of 2 and 3 respectively.

Most of the banks in the core euro zone have scores of 1, indicating the highest liquidity.

Prepare For Impact

The markets were also digesting the implications of yesterday’s FOMC statement.

There was a notable change in language that suggests the FED is preparing the way for the next stage of quantitative easing, possibly as soon as November.

The statement made clear that the FED is aware of the risk of deflation, and is prepared to use unconventional measures to counter this.

This implies that if inflation is persistently below target in the months ahead then the FED will ease policy.

“Whether this tool will be effective in promoting growth is open to question,” Gavan Nolan notes.

The Bank of England MPC minutes Wednesday indicated that they are also looking at further stimulus measures, though they are not in the position to use dormant inflation as a rationale.

(Source: Markit Financial Information Service)

  • Markit iTraxx Europe 114.5bp (+4.5), Markit iTraxx Crossover 520bp (+10.5)
  • Markit iTraxx SovX Western Europe 162bp (+5)
  • Markit iTraxx Senior Financials 145.5bp (+8.5)
  • Sovereigns – Greece 800bp (-5), Spain 235bp (+1), Portugal 395bp (+30), Italy 198bp (+6), Ireland 465bp (+31), Belgium 143bp (0), Hungary 347bp (0)
  • BP 195bp (+1)
  • AIB 615bp (+58), Bank of Ireland 515bp (+86)

Irish CDS Spreds Back To Record High After Bond Sale

Markit Launch Liquidity Metrics for Euro Loans

Survey: Market Surprised By Negative Derivative Perception

Bank Funding Crunch Deepens as Swap Rates Soar

Spec-Grade Liquidity Worsens

Killing My CDS Softly

Living In A Derivative World

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Irish CDS Spreads Back To Record High After Bond Sale

European credit spreads were moderately tighter Tuesday ahead of the much anticipated FOMC decision due after the close. The other keenly awaited event of the day, Ireland‘s government bond auction, failed to deliver the market direction that many had expected.

“Even though the sovereign is fully funded for 2010 and this auction was pre-funding for 2011, investors are concerned that its broken banking system could force it to seek external aid and/or restructure in the medium-term.”

Gavan Nolan


The auction was deemed a success by most observers, with the sovereign selling the maximum EUR1.5 billion, Markit reports.

The EUR500 million four-year issue had a bid-to-cover ratio of 5.1, more or less in line with the 5.4 achieved last month.

The EUR1 billion eight-year issue had a bid-to-cover of 2.9, matching the last such issue in July.

But the yields of 4.767% and 6.023% were significantly higher, reflecting the deterioration in Ireland’s credit standing in recent weeks.

Spreads Back To Record High

Ireland’s spreads tightened after the auction results were announced.

However, the 20bp gains were short-lived, and Ireland’s spreads are now more or less unchanged from yesterday’s levels, i.e. close to record wides.

“Even though the sovereign is fully funded for 2010 and this auction was pre-funding for 2011, investors are concerned that its broken banking system could force it to seek external aid and/or restructure in the medium-term,” Gavan Nolan at Markit Credit Research writes in a statement.

Such fears have been allayed on Spain, at least for the time being.

The country also sold debt yesterday, and had little difficulty in placing EUR7.036 billion of 12- and 18-month T-bills, slightly more than the EUR6-7 billion indicative range.

Bid-to-covers were down from the previous auctions but that was no great surprise given the size of the debt sale.

(Source: Markit Financial Information Service)

Greece continued to outperform after it saw strong demand for EUR390 million 13-week T-bills.

Expecting Unconventional Measures

In North America, better than expected US Housing Starts figures were overshadowed by the impending FOMC decision.

“An announcement of further QE is thought unlikely but investors will be looking for a shift in language that suggests more “unconventional” measures are probable in the months ahead,” Nolan says.

  • Markit iTraxx Europe 110.5bp (-0.5), Markit iTraxx Crossover 512bp (0)
  • Markit iTraxx SovX Western Europe 158bp (+0.5)
  • Markit iTraxx Senior Financials 138bp (+2)
  • Sovereigns – Greece 805bp (-20), Spain 235bp (-3), Portugal 372bp (0), Italy 192bp (-2), Ireland 442bp (+4), Belgium 142bp (-3), Hungary 346bp (-7)
  • BP 195bp (-5)

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