What, the Markets Need to be 'Calmed' Again Already?  CDS on Spain Streak Toward All Time High

As Reuters reports, just ahead of an important Italian debt auction, an ECB official was wheeled out to 'calm the markets' by reminding everyone that the ECB's hand remains close to the spigot. Apparently the SMP ('securities markets program') is about to be reactivated.


„Giving some respite to riskier assets, ECB Executive Board member Benoit Coeure said the scale of market pressure on Spain is not justified and the ECB still has its bond-buying program as an option.

"A suggestion by an ECB board member that they could reactivate the SMP (Securities Markets Programme) facility helped to bring calm to a feverish Spanish bond market," said Sebastien Galy, strategist at Societe General.

"The relief could be felt more globally, but it was limited in scope indicating that we remain in a roller coaster and are not at the end of it yet."

Another test for the currency comes later in the day as Italian three-year borrowing costs are set to jump by a percentage point from a month ago at a bond auction, the latest sign investors' concerns about Spain are spreading to other euro zone countries hit by recession.“


(emphasis added)

However, the whole world already knows that the SMP bond market manipulation program is a failure. What we're saying here is not necessarily that 'it will be a failure in the long term', but 'it is a proven failure already in both the short and long term'. This at least should be the assessment of the ECB itself, if it were to honestly assess the program.

The program's expressly stated purpose is to manipulate the bond market yields of peripheral euro area sovereigns that are under pressure due to their debt having become a hot potato. So how should one define the success or lack thereof of the program? Doing so by the terms the program's authors have set for it,  one must conclude that the program might as well not exist. The bond markets that have come into the ambit of the SMP have collapsed in spite of it. Every time the ECB was in the markets as a heavy buyer,  it never managed to manipulate yields lower except perhaps for a single trading day here and there. The rest of the time, yields moved swiftly higher along their primary trend.

Since the SMP is sterilized through a special deposit facility that is rolled over once a week, there is no 'snowball effect' via the fractionally reserved banking system – the liquidity added to the system due to the ECB's bond buying is withdrawn immediately again. So the failure of this particular market manipulation device is probably preordained from the outset. The only effect as a friend pointed pout to us yesterday is that the banks and/or other bondholders are relieved from having to hold on to the hot potatoes, which now decorate the ECB's 'bad bank' balance sheet.

So we have no idea why any market participants in their right mind would actually be 'calmed' by Mr. Coeure's hints. In fact, those hints are if anything a good reason to panic, since they must be taken as confirmation that the central bank expects these markets to come under considerable additional pressure without fresh interventions.

If a big player in the markets officially promises to manipulate prices, what else could it mean? Evidently it is an admission that he believes these prices would deteriorate in the absence of such manipulation. This in turn also means that the continually repeated mantra that 'everything is fine with Spain' is complete nonsense. Absolutely nothing is 'fine' in Spain at present.

In fact, official assurances that 'things are just fine' were heard in every single instance just before the crisis toppled a new domino that ended up under the umbrella of the EU/IMF bailout vehicles. The more strenuous the assertions that the 'markets have it wrong', the more likely it is that the markets have it exactly right.

In fact, as you can see below, CDS on Spain's government debt are now close to tackling the all time high seen in November last year – and the move has recently accelerated.


Credit Market Charts

Below is the customary collection of charts: CDS on various sovereign debtors and banks, bond yields, euro basis swaps and a few other charts. Charts and price scales are color coded (readers should keep the different scales in mind when assessing 4-in-1 charts). Prices are as of Wednesday's close.

Obviously, Spain is currently the market's focus, but it certainly appears that contagion is  making a comeback.

All in all, the charts seem to be indicating that the 'crisis pause' induced by the LTRO exercise could be over. If so, then the ECB's last intervention is mostly remarkable for how quickly its effects are dissipating.

Euro basis swaps are now swiftly moving in the 'wrong' direction again as well, a sign that euro area banks are once again finding it more difficult to obtain dollar funding.

Related to this is the fact that our index of euro area bank CDS is also streaking higher at great speed of late.

Is it a decisive trend change? We can obviously not tell for sure just yet. It certainly is one in the case of Spain, but it may well be that the markets decide to calm down again of their own accord in the short term and await further fundamental developments.

The problem is, we don't see how said fundamentals are supposed to actually get better in the near term. That seems rather unlikely in fact – and should the recent short term trend change turn into a bigger move and other markets follow the deterioration in Spain's bond yields and CDS with more verve, then the euro area will be right back where it left off last November.



5 year CDS on Portugal, Italy, and Spain – click chart for better resolution.



5 year CDS on France, Belgium, Ireland and Japan – with the exception of Ireland, multi-week highs all around – click chart for better resolution.



5 year CDS on Bulgaria, Croatia, Hungary and Austria – by now we can probably call it a new uptrend – click chart for better resolution.



5 year CDS on Latvia, Lithuania, Slovenia and Slovakia – this certainly looks like a trend change as well – click chart for better resolution.



5 year CDS on Romania, Poland,  the Ukraine and Estonia – click chart for better resolution.



CDS on Germany, the US and the Markit SovX index of CDS on 19 Western European sovereigns – a multi-week high in the SovX as well – click chart for better resolution.



5 year CDS on Bahrain, Saudi Arabia, Morocco and Turkey – click chart for better resolution.



Three month, one year, three year and five year euro basis swaps – it appears the recovery is over – click chart for better resolution.



Our proprietary unweighted index of 5 year CDS on eight major European banks (BBVA, Banca Monte dei Paschi di Siena, Societe Generale, BNP Paribas, Deutsche Bank, UBS, Intesa Sanpaolo and Unicredito) – it's now at the highest level since January – it seems we were correct when we warned of a likely trend change following the re-test of lateral support – click chart for better resolution.



5 year CDS on two big Austrian banks, Erstegroup and Raiffeisen – click chart for better resolution.



10 year government bond yields of Italy, Greece, Portugal and Spain – Spain's yields are now also back in territory last seen in November – click chart for better resolution.



Austria's 10 year government bond yield, Ireland's 9 year yield, UK gilts and the new Greek two year note – 'safe haven' gilts are back in demand; we wonder why anyone would think UK debt deserves to be regarded as 'safe'. It certainly takes a bit of imagination to come to such a conclusion, but apparently that is the market's verdict for now – click chart for better resolution.



5 year CDS on Australia's 'Big Four' banks – this also looks like a trend change by now – click chart for better resolution.




white line: real 12 month forward lending rates, red line are the nominal rates. Real rates have turned positive in China, which makes an easier monetary policy by the PBoC more likely – click chart for better resolution.






Charts by: Bloomberg



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