Oct 31. Italian bond yields aren’t following the “bailout” script

Oct 31.  “Obviously, it is up to the European countries themselves to tackle their financial problems. But China can do within its capacity to help as a friend.” (Reuters quoting China news).
–Not surprisingly, the solution for europe involves saving the banking system with a taxpayer backstop, in the form of an SIV (Structured Investment Vehicle).  If you recall, many banks had SIV’s which thoroughly unraveled in late 2007.  The structure was to set up an SIV, implicitly backed by the parent bank, which issued its own Commercial Paper at a low rate, then levered up, buying longer dated assets. When the markets’ confidence in the (MBS) assets waned, the CP market dried up and banks were forced to bring SIV’s back to their own balance sheets. But this time the risk burden falls obviously on the Germans (the parent bank). And while many european banks have rallied 50% off the lows as risks appear to shift to the state, and as the prospect of having to pay out on CDS shorts lessened with the Greek debt ‘voluntary’ writedown, the value of the underlying assets, e.g. Italian bonds, didn’t improve.  Italy 10 yr debt traded over 6% Friday.  The investors that the eurocrats hope will buy the CP (and thereby fund the SIV), China, and Brazil, aren’t oblivious to these facts…
–Eurodollars rallied Friday as did treasuries.  The ten year yield fell 8 bps to 231.  If a primary purpose of eurodollar and treasury futures is to provide a hedge against higher rates, then one might conclude the need for such insurance (for example against a dollar funding crunch) is evaporating with yet another example of gov’t sponsorship to aide “private” banks.  And going into this week’s FOMC amid chatter of need for more QE, the thought of shorting treasuries loses some of its allure.
–In my opinion, it’s only a matter of time for a true default, with real writedowns that aren’t gently negotiated, occurs.  But the timing is hard to nail down.  For example, most people accept the idea of “peak oil”, but the worst predictions have failed to come true.  Of course, human ingenuity and alternative energy sources can perhaps avert a power crisis.  But the only thing that gets rid of debt is write downs.  Speaking of oil, here’s a snippet from “Things that make you go Hmmm”:   The so-called “Arab Spring” uprisings in countries such as Egypt and Libya are forcing these and other major oil producing nations to spend more of their oil revenue on social assistance programs. For example, as a result of newly announced social spending in Saudi Arabia, it is forecast by The Institute of International Finance, Inc. that the budget balancing price of Saudi oil will jump from $68 per barrel in 2010 to $85 per barrel in 2011 and then continue to rise, but at a slower pace, to $110 per barrel by 2015.

Posted on October 30, 2011 at 1:21 pm by alexmanzara · Permalink
In: Eurodollar Options

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