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October 2011

Italy 5 year yield spreads blow out to record wides

Today we had one of the biggest ever days of peripheral sovereign bond buying from the SMP (Securities Market Programme), with some banks estimating that over €5bn of peripheral sovereign bonds were purchased via the ECB’s bond buying program in an effort to keep a lid on peripheral sovereign bond yields. About two thirds of these purchases were directed towards Italian government bonds, and It…

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Banks’ Q3 earnings – Trick or treat?

It’s that time of year when the tradition of All Saints’ Day gets blurred with modern commercialism. It is the turning of something scary into something fun, which has become an excuse for children to be rewarded for dressing up and behaving poorly.

In the more grown up world, this quarter’s banking results have been poor and are also dressed up. What’s lurking under the costume?

The oddest thi…

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If sovereign CDS is no longer an effective hedge then who’s in trouble?

Current plans are for Greek restructuring to be ‘voluntary’, which means that it would fail to trigger CDS (see here).  CDS is supposed to be the cost of insuring against default.  If Greek restructuring fails to trigger CDS, then CDS would lose its credibility as an effective hedging instrument against sovereign default.  Such actions would  have absolutely huge implications as all the banks w…

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Eurozone mess – time for inflation protection

Travelling through Switzerland I can’t help but think that politicians both here and in the UK have a lot to thank their predecessors/electorates for.  The relative safe-haven status enjoyed by both economies reflects, at least in part, the arm’s length relationship with the euro. (Swiss readers may not take kindly to being compared with us Brits, but you take my point.)

The eurozone policy mak…

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What is the increase in US money supply telling us?

Bernanke is clear about why the Fed has embarked on “Operation Twist” – the Federal Reserve has both greatly increased its holdings of longer-term Treasury securities and broadened its portfolio to include agency debt and agency mortgage-backed securities. Its goal in doing so was to provide additional monetary accommodation by putting downward pressure on longer-term Treasury and agency yields…

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French bonds following the path trampled by Greece, Ireland, Portugal, Spain and Italy

We’ve already discussed how EFSF doesn’t work as a private sector solution to the Eurozone debt crisis here, and have explained how the idea of turning the EFSF into a monoline insurer is ludicrous here.  EFSF bonds continue to perform poorly – the inaugural €5bn 5 year EFSF bond issued in January came with a yield spread of about 40 basis points over 5 year German government bonds, and is toda…

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Pickled Onion Monster Munch – without looking, how many monster feet do you get in a packet?

Earlier this month the Nobel Prize for Economics went to Sargent and Sims for their work on cause and effect in macro economic policy.  All good stuff of course, but it pains us that nobody is looking at the more micro-economic problems of the modern economy – in particular, WHAT KIND OF WORLD IS IT WHERE YOU ONLY GET EIGHT MONSTER MUNCH IN A PACKET?

We have discussed food price inflation in pr…

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Mummies’ boys – the number 1 variable for predicting Eurozone sovereign stress?!

I was reminded today of the tongue-in-cheek chart that we put on this blog a year ago showing the close correlation between sovereign 5 year CDS (i.e. the cost of insuring governments against default) and the percentage of men aged 25-34 who still live with their parents within the Eurozone founder member countries (credit to JP Morgan).  This was a prompt to do an update, and the outperformanc…

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So the authorities have seemingly realised the old EFSF plan doesn’t work. What about the new plan?

There has been a lot of press coverage about the proposal to turn the existing EFSF (European Financial Stability Facility) into a monoline insurer of sovereign debt, where the new structure would be called the European Sovereign Insurance Mechanism (ESIM).

How is the ESIM supposed to work in theory?  No concrete details have been announced, but the basic thrust of the proposal is that the EFSF…

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Rating agencies adding to UK banks funding problems

We heard yesterday that Fitch has followed Moody’s lead and begun downgrading UK banks’ credit ratings. This reflects the reduced level of support offered by the government. Fitch only actually downgraded Lloyds and RBS – both to A – but Moody’s went further last week, downgrading a total of 12 banks and building societies. These new ratings have not entirely removed the implied tax payer suppo…

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