Jan 23. US Ten year back above 2% as further QE questioned

Jan 21. Ten year note finally edged back above 2% at 2.03 on Friday, up 6 bps on the day. The curve steepened, most notably further back. For example, red/gold euro$ pack spread made a new high at 176 bps (+5.25), but red/green was only up 1 (to 39). New high in 2/10 treasury spread to 179. The catalyst for the move was a WSJ article suggesting that plans for QE3 were being tabled for the short term.
–The Fed will release its Summary of Economic Projections Wednesday, with information on interest rates, inflation, size of the Fed’s balance sheet. Given uncertainties in Europe, China, and the oil wild card of the Mideast, such projections can only be considered rough guideposts to current thinking; subject to change rapidly. Recall that last year the ECB hiked rates, an indication of just how wrong a central bank can be.
–From a recent Roubini paper: “Indeed, in recent private conversations, senior White House and Treasury officials have expressed serious concern about a scenario in which the euro falls by another 20-30% relative to the dollar.” Why? Because export competitiveness of the US will be compromised.
–There is a fascinating piece on Zero Hedge about the Greek bond situation.
Link below but I will attempt to summarize. Most Greek bonds were issued under Greek law, but, according to the article, 25-40 billion euro were issued under UK law with Collective Action Clauses [out of about 350 billion]. These clauses allow a cramdown of new terms to all bondholders as long as 2/3 of holders agree. According to the article, hedge funds have been trying to accumulate a stake of 34% or more of these bonds, which will make a cram down favorable to Greece unlikely…and if Greece chooses to change the terms of the bonds issued under ITS laws, it will lead to classes of subordination in all sovereign bond markets, causing further funding problems for all sovereigns. The upshot is that a relatively small bloc position in the Greek bond market might have overwhelming sway in the outcome, which of course will have ramifications for Portugal, Ireland, etc.

Collective action clauses (CACs) are a new element in the international financial architecture which is to ensure orderly and timely resolution of sovereign default. This feature is expected to contribute to the more orderly resolution of sovereign debt crises by preventing unwarranted creditor holdouts.

Posted on January 23, 2012 at 5:23 am by alexmanzara · Permalink
In: Eurodollar Options

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