August 27. “Turn” pressure on December euro$ contracts

–The Bundesbank’s Weidmann threw cold water once again on ECB plans to buy sovereign debt. (Reuters) …Weidmann, a former economic adviser to Merkel, said in a front-page interview in influential German magazine Der Spiegel that the bond buys could violate rules against the ECB providing outright financing to governments.
“Such a policy is for me close to state financing via the printing press,” Weidmann told Spiegel. “In democracies, it is parliaments and not central banks that should decide on such a comprehensive pooling of risks.”
–(BBG) “Premier Wen Jiabao said China needs targeted measures to promote steady export growth…” The question of course, is export to who? (especially now that Europe is imploding and the US lost the mortgage equity withdrawal piggy bank). It’s an admission that China is decelerating. (New lows in Shanghai Composite this morning).
–Reuters has an interesting article about Dexia, which was to sell its Dexia Luxembourg unit to a Qatari buyer. http://www.reuters.com/article/2012/08/25/us-dexia-capital-idUSBRE87O03O20120825 However, in order for the sale to go through, Dexia agreed to buy back the (hot potato) bond portfolio of the Lux arm, likely necessitating an additional public capital infusion, for the third time. You know who else had an “asset” that didn’t have value? Refco. And when that came to light the company closed and people went to jail. You know who else has assets that aren’t being carried at “value”? It’s just a wild guess on my part, but I would say a lot of european banks. Which the ECB wants to save. I think a wave of bank nationalizations will occur, maybe just idle speculation on my part.
–What is sort of interesting though, is a possible connection between ECB actions and the euro$ curve. As you can see from the attached euro$ butterfly spreadsheet, there is a bit of pressure on December eurodollar contracts. This used to be common in the old days due to end of the year funding demands…it was called the “turn”. There hasn’t really been turn pressure in a long time, perhaps ever since the Fed guaranteed to cap funding pressure over the turn of the millennium. However, if you look at the flies, it’s apparent that there is pressure on the EDZ’14 contract. (For example the 6 month fly starting EDZ14 is -10.5, while on either side of that contract they are -7.5 and -6.5). Why?? The only reason I can think of has to do with the ECB’s LTRO program (to save the banks with low, long term funding). Note that the initial 3 yr LTRO started in Dec 2011…with maturity dates on Jan 29, 2015 and Feb 26, 2015 (in the 3 month period priced by EDZ14). http://www.ecb.int/press/pr/date/2011/html/pr111208_1.en.html Is the market pricing in funding pressure for the maturity of these periods? It looks like it to me. Of course, it’s also the end of the Fed’s vow to keep low US rates until late 2014 (currently). And while there is a degree on pressure priced into the euribor curve on ERZ14, it’s not as noticeable as it is in dollars.
–NOTE: I probably haven’t done enough groundwork on the idea of this being related to the LTRO’s to put it out. I may be completely off base. Any comments are appreciated.

Posted on August 27, 2012 at 4:53 am by alexmanzara · Permalink
In: Eurodollar Options

Leave a Reply