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No Publicity is Bad Publicity? Tell that one to Greece…

June 21st, 2011 Michael McDonough Comments off

While it’s often said no publicity is bad publicity Greece is a clear exception to the rule.  Mentions of Greece in stories on the terminal are approaching its May 2010 high; corresponding with the period Greece first accepted an EU sponsored bailout.  Greece’s more frequent mentions has come at a cost for the country and investors alike as bond yields soar, while the price of protecting against a Greek default through CDS rises precipitously.

Greece’s ten year yield is presently trading just shy of 17 percent, highlighting that investors have likely already accepted the inevitable that the country cannot survive without bond holders taking a significant haircut.  The cost of protecting against a Greek default is approaching 2000 basis points, making it more than three times as risky as Argentina on a five year CDS basis.

Greece will be holding a critical confidence vote tonight for Prime Minister George Papandreou that will likely determine whether the country will be forced to default/restructure now or in several months’ time.  After this vote Greece will have two weeks to pass additional austerity measures to unlock an additional EUR12bn in aid from its neighbors—Greece owes approximately EUR18bn in debt payments now through August.  In any case, any European aid will likely prove to be a temporary relief with this scenario playing out again and again until a painful restructuring is finally undertaken.

Hesitation from Eurozone officials around a Greek restructuring are being stoked by the possible impact on their own countries.  Officials are likely trying to buy time in hopes of finding calmer markets before forcing Greece to restructure limiting the potential contagion effect.  The problem is markets can’t calm, while there is still a hurricane raging in Greece.

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Bloomberg Briefs’ Global Central Bank Monitor

March 24th, 2011 Michael McDonough Comments off

To subsribe please go to {BRIEF <GO>} on your terminal , or visit www.bloomberg.com/brief

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Sign up for the Bloomberg Brief Economics Newsletter

November 11th, 2010 Michael McDonough Comments off

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The QE Trade Road Map From the Bloomberg Brief: Economics

November 3rd, 2010 Michael McDonough Comments off

When the Federal Reserve launched its unprecedented program of quantitative easing in early 2009, it was difficult to predict how various asset classes would react. Now, as the Fed considers a second round of asset purchases, the first program has left a blueprint of sorts behind that could be useful in predicting how markets might respond. The table here shows, as measured by R^2, how strongly the fluctuations in a variety of assets are correlated with the level of securities held by the Fed during the first six months of 2009. The table also displays the performance of these assets during the first half of 2009, as well as in the period since Fed Chairman Benjamin Bernanke’s Jackson Hole speech, where he laid out the case for additional quantitative easing.

To subscribe for free go to {BRIEF <GO>} on any Bloomberg terminal or if you don’t have a terminal go here to subscribe for a fee: www.bloomberg.com/brief

**This is an excerpt from the Brief published on 10/29/10**

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Germany vs. France Not Just Being Played on the Pitch

June 17th, 2010 Michael McDonough Comments off

The spread between France’s and Germany’s 10y Government bonds remain near levels not seen since the collapse of Lehman as France takes on tough fiscal tightening.  Since the onset of the European debt crisis France and German yields have benefitted from worried investors moving funds away from economically weak Eurozone peripheries to the regions ’stable’ AAA rated credits.  However, after being blindsided by Europe’s debt crisis investors are developing a new sense of risk, which doesn’t bode well for France’s lackluster history of correcting past deficits, especially while its current budget deficit approaching 8% of GDP.    This has given Germany an edge in investors’ flight to quality. France has already undertaken remedial measures to rein in the deficit, including raising the retirement age to 62 from 60, prompting  protests from the country’s socialist party and labor unions.  France will likely struggle with its ability to rapidly implement the necessary austerity policies, with any significant slippage, or success, revealing itself in the country’s spread to equivalent German government bonds.

Source: Bloomberg

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Spain Begins to Echo Greece

June 16th, 2010 Michael McDonough Comments off

The spreads for Europe’s economically weak peripheries over equivalent German bonds—the European benchmark—continue to approach their pre-bailout highs.  The 10Y spread in Spain again reached record levels amidst rumors that IMF, EU and the U.S. Treasury may be creating a EUR250bn credit line for the country (so far the EU and the Treasury department have denied the report).  This coming Friday the head of the IMF, Dominique Strauss-Khan, is scheduled to meet with Spanish Prime Minister to discuss, “structural reform measures the government is undertaking, the labour reform to be approved tomorrow by the cabinet, and other measures to tackle the deficit, as well as measures by other countries and other economic zones.”  Spanish officials have indicated that these meetings were scheduled prior to reports of a Spanish bailout.  But, in the minds of some investors this visit is too coincidental, echoing a similar visit by the IMF to Greece just prior to that country’s own demise. 

Amidst this strife, Spain is expected to auction 10Y and 30Y government bonds tomorrow totaling an estimated EUR3.5bn.  This auction will be watched closely by investors, and any signs of weakness could spell trouble for Spain, Europe and any global risk correlated assets.  Here is a complete list from Barclays of expected European bond auctions for the remainder of the week:

Date            Country     Bond                                       Amount (EURbn)

17-Jun-10     Spain        10y SPGB (total range €2-3.5bn)    2.00

17-Jun-10     Spain        30y SPGB (total range €2-3.5bn)    1.50

17-Jun-10     France      2yr BTAN (range €6.5-8bn)              2.00

17-Jun-10     France      3yr BTAN (range €6.5-8bn)              2.00

17-Jun-10     France      New 5yr BTAN (range €6.5-8bn)     4.00

17-Jun-10     UK            2014 Gilt tap                                     4.00

17-Jun-10     France     OATi Auction (range €1.3-1.8bn)      0.50

17-Jun-10     France     OATei Auction (range €1.3-1.8bn)    0.40

17-Jun-10     France     OATi Auction (range €1.3-1.8bn)      0.70

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Risk Makes a Comeback

June 14th, 2010 Michael McDonough Comments off

Investors are feeling more at ease with the uncertainty facing global market.  The AUD/JPY exchange rate—a popular FX carry trade and risk metric—has moved off of its recent lows of less than 74 to a level of 79.4.  At the same time, 3M LIBOR halted its climb, and has remained fairly steady around 0.54%, albeit still more than double early March levels.  Investors growing appetite for risk partially stems from a successful Spanish three year government bond auction last week, which received a surprisingly strong bid to cover of 2.1, while still yielding an elevated 3.3%–compared to less than 2% for bonds of a similar duration in March.  Spain is scheduled to reopen EUR3.5bn of 10Y and 30Y bonds on June 17th.  With a relatively quiet week on the data front—barring the auctions in Spain and a European summit on Thursday—traders will likely continue adding on risk, pushing European spreads down; US Treasury yields up, all boding well for growth correlated assets, including equities.   

Source: Bloomberg

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France Shows Signs of Weakness…

June 9th, 2010 Michael McDonough Comments off

France is no European angel in terms of its fundamental, yet like Germany the credit has received  ’safe-haven’ status from investors; that is until recently.  French 10Y government bonds have traded mostly lockstep with equivalent German debt since the onset of the European debt crisis, but since the beginning of June the spread between the two have begun to widen.  Historically, France and Germany have had easy access to global financial markets, allowing them to readily issue large sums of Euro denominated bonds, separating the pair from smaller Eurozone peripheries including Greece.  However, investors are growing increasingly concerned over France’ ability to to rein in spending and control a surging deficit.

One of the best quotes I have seen on the topic comes from Nicolas Lenoir, chief market strategist at ICAP Futures LLC, who says, “Being French I can promise you first hand that if there is any form of austerity required as part of the $1 trillion package it will not fly one bit,” Lenoir said in a recent correspondence “We had riots with a daily car-burn rate above 1,200 for over a week because a teenager electrocuted himself trying to escape from the cops, so just try and imagine if railway workers can no longer retire at 50 or 55 after being driven to exhaustion watching a computer do their job 35 hours a week.”  In short, investors’ recent concerns–demonstrated by rising spreads to Germany–are likely not unfounded given France’s past on implementing such measures.  Looking ahead, France will likely continue to come under the microscope of investors, and without clear continued indications the country is headed in the right direction what historically has been easy access to foreign money may feel a bit more painful.

Source: Bloomberg

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This Week’s Critical Government Bond Auctions, & Worries for Spain

June 8th, 2010 Michael McDonough Comments off

Keep an eye on these government bond auctions, especially for Spain and Portugal, as a bad auction can provide the catalyst for further risk aversion:

June 9th:
09:00 GMT Germany: 2y Schatz Auction €6bn
09:30 GMT Portugal: 3y and 10y auctions €1.5bn
09:30 GMT UK: New 2020 Gilt £3.75bn
17:00 GMT US: 10y Note Auction $21bn

June 10th:
02:00 GMT Japan: 5y JGB Auction ¥2400bn
08:30 GMT Spain: New 3y SPGB Auction €4.5bn
17:00 GMT US: 30y Bond Auction $13bn

June 11th:
09:00 GMT Italy: 5y and long end BTP Auctions €7bn

*Data compiled by Barclays

Spain has a signiifcant amount of debt coming due in July, which won’t go unnoticed by investors, especially if their upcoming auctions fair worse than expected:

Source: Bloomberg

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Spreads in Europe on Track to Test Pre-Bailout Levels

June 7th, 2010 Michael McDonough Comments off

The aggregated spreads of Europe’s weakest peripheries plus Belgium are on track to test their pre-bailout levels, as investors question whether or not a default will become necessary and what contagion effects it might have.  The biggest concern is that a default could lead to a Lehman like effect halting liquidity as banks and investors question each other’s exposure to the defaulted debt potentially leading to a significant funding issue for seemingly non-effected nations.  On this note, the German backed-bailout was not just a rescue of its profligate neighbors, but also its domestic banks, which are said to have significant exposure to the bonds in question.  In any case, trader sentiment toward the Euro is likely to remain weak as spreads drift higher for economically weak nations as the fine balance between effective fiscal austerity and growth is hopefully discovered. 

 Aggregate 10Y Government Bond Spreads Over Germany:

Source: Bloomberg

As an aside, over the past week Belgium yields have experienced the largest increment of the 20 European nations I track, which should continue to be monitored.  Belgium has one of the largest debt to GDP ratios in the region, a relatively weak fiscal deficit, and regional and political strife.  As the situation in Europe deteriorates, investors will likely continue focusing on Belgium, a trend that can already be seen through the past week’s spike in yields.  Prior to now investors had given the credit a pass partially due to a history of positive primary surpluses and its historical precedent of reining in wavering finances.  Belgium’s debt to GDP ratio is expected to climb to over 100% of GDP by the end of this year.  

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