Italy Calls ECB's Bluff As Mario Draghi Is Forced To Double Italian Bond Purchases, Take Total To €110 Billion
When last week Italian bonds threatened to plunge every single day (to levels since seen earlier today week when the spread between the 10 Year BTP and the Bund has soared to 490 bps), many speculated that the ECB intervened every single day, and occasionally two or even three times. Now we have confirmation that in his first week on the job, Mario Draghi is already well on route to undoing everything that his predecessor did previously: his first action as head of the ECB was a surprise lowering of rates, and now he has bought double the amount that the ECB purchased in the prior several weeks, and the most since September 16. Altogether the ECB has monetized, granted with sterilization for now until of course Europe's banks end up being unable to sterilize these purchases and the ECB ends up holding the full unsterilized bag, a whopping €188 billion since its inception in May 2010. Of this, €110 billion has been dedicated exclusively to Spain and Italy, or rather, just Italy. This is in three short months. Good luck to the ECB as its winds down its SMP program, as mandated by Germany, and the EFSF is supposed to commence buying Italian paper in the open market.
Dan Loeb has released his complete Q3 investor letter in which he discusses his net and beta-adjusted exposure ("we only gradually increased our exposures near the market bottom and thus underperformed during the dramatic rise in October. While we have not generated significant gains this year, we have protected capital and exhibited materially lower volatility than the markets.") which we applaud, as it proves the fund manager does not simply chase the crowd but actually thinks before he jumps off the cliff; explains the risk transformations to the fund's portfolio ("Beginning in mid?February, we started reducing our long equity exposure primarily due to the “Arab Spring” revolutions, which prompted concerns about potential disruptions in oil supply. We reduced our exposure to cyclical and leveraged investments, including in semiconductors, financials and truckers. This wave of selling, which continued through the Japanese tsunami and earthquake crisis, resulted in relatively defensive net exposure. Later in the Second Quarter, we diminished risk by adding single name equity shorts, taking that portfolio from $600M to $1.6B. Through September 30th, our long and short portfolios netted nearly the same amount despite long dollar exposure of 3x more than short dollar exposure."); answers the critical question everyone is asking ("The main question on every investor’s mind is when we will start to significantly increase market exposure....we have taken small advantage of the optimism regarding the European situation that drove October markets sharply higher. We remain patient and cautious for the moment until we determine it is time to deploy our dry powder decisively."), and provides details on the fund's entry into the reinsurance business.
With the soap opera moving from Greece to Italy, the entertainment factor is about to have a step function move higher. Here is the latest on the Berlusconi "resignation" farce from La Repubblica, google translated: "Free Berlusconi: "I want to see in his face betrays those." Silvio Berlusconi does not resign. Available on the phone with the Prime Minister gave to displace those who resigned and revealed: "Tomorrow is the statement in the House vote, then I will trust the letter submitted to the EU and the ECB. I want to see in the face of those who try to betray me. I do not understand how they are circulated the voices of my resignation, are devoid of any foundation, "said the premier." Needless to say, grammatical perfection is irrelevant here: the message is all too clear - unless Silvion gets full immunity and prosection guarantees from his replacement, he will not step down. The question is can anyone give such a promise to the billionaire?
Well what do you know: you can beat them, you can trash them, you can make them illegal, you can even leave them for dead. But at the end of the day all Credit Default Swaps do is tell the truth better than any career politician.
- Political and debt concerns pertaining to Italy remained the main focus in the market today. News that the Italian PM Berlusconi may resign soon strengthened appetite for risk, however the news was later denied by Berlusconi
- ECB's Mersch said that the ECB constantly discusses the possibility of ending bond-buys if Italy does not meet reform pledges
- Market talk of the ECB buying the Italian government debt helped the Italian/German 10-year government bond yield spread to come off its widest levels
- CHF came under pressure across the board following dovish comments from SNB's Hildebrand allied with an unexpected decline in the Swiss CPI data
Germany has rejected proposals by France, Britain and the US to have German gold reserves used as collateral for the Eurozone bailout fund. Germany Economy Minister Philipp Roesler said on Monday that the German people's gold reserves cannot be touched and “must remain off limits." "German gold reserves must remain untouchable," said Roesler, who is head of the Free Democrats (FDP), a partner in Chancellor Angela Merkel's coalition. Roesler added his voice to opposition to an idea proposed at the G20 summit of using reserves including gold as collateral for the euro zone bailout funds. The Bundesbank and Mr. Seibert, spokesman for Merkel, said Sunday that they too ruled out the idea discussed at the summit of Group of 20 leading economies last week. Mr. Seibert dismissed media reports yesterday that the plan to boost bailout funds, to aid Italy or another large euro zone country, would require Germany to sell off part of its gold and foreign exchange reserves. “Germany’s gold and foreign exchange reserves, administered by the Bundesbank, were not at any point up for discussion at the G20 summit in Cannes,” he said.
- China Stocks Drop Most in Two Weeks on Slumping Auto Sales, Property Curbs (Bloomberg)
- Berlusconi’s Majority Unravel as Allies Turning (Bloomberg)
- Greece to form coalition government (FT)
- Wen Pledges Property Tightening Resolve (WSJ)
- G20 seeks more talks on eurozone crisis (FT)
- ECB Free to Stop Buying Italian Bonds, Mersch Tells La Stampa (Bloomberg)
- Unloved Treasury Notes Becoming Investor Favorite in Fed’s Operation Twist (Bloomberg)
Perhaps when the fate of the $60 trillion bond market rest on one Facebook status update, it is time to officially call it a day?
When all else fails, and with the Italian 10 Year hitting a new all time record of 6.6% and sending the Bund-Italian spread to the nausea-inducing 500 bps, all else has failed, spread wishful rumors of resignations. Sure enough, the Italian 10 year notes have pared dramatic losses amid reports of an imminent Berlusconi resignation. Italian PM Silvio Berlusconi may step down within “hours,” according to an article written by former minister Giuliano Ferrara in the online edition of Il Foglio, news agency Ansa reported. "Some people say it could be minutes,” Ferrara wrote on the website, according to Ansa. This, coupled with yet another round of ECB intervention has managed to bring the spread inside by... a meager 17 bps, keeping the Italy Bund spread still a well over 470 bps.
Based on the detailed exposures and DV01s thet Jefferies released on Friday, which we discussed as evidence of an implicit 2s10s (approximate maturities) curve steepener, it would seem that the dramatic shift flatter in the Italian bond curve this morning could be problematic. The huge 35-40bps compression in the spread between 2Y and 10Y BTPs is the second largest ever (largest being 4/8/11) and represents an 8 standard deviation drop compared to the last 8 years. This could mean a significant loss for the JEF book - unless they are perfectly hedged through BTP futures - which it does not seem is clear from the exposure sheet. The Italian yield curve has flattened over 100bps since the end of the EU Summit - inching perilously close to inversion which hasn't been seen since 1994.