The German/Greek 10-year spread widened out considerably today. As we noted yesterday, we were wary of the Greek situation in that the spread failed to narrow even with a very good auction with the bid to cover 4-1. Today’s crushing of Greek debt has put pressure on the EURO and EURO crosses. Even the Italian, Spanish and Portuguese debt levels widened from 7-10 basis points versus the German. This is going to be very problematic as the other PIIGs are now going to be attacked. Markets are like water in that it seeks out its lowest levels and removes all the flotsam and jetsam in its way.
As we write, the FED announces that rates are unchanged and will be so for an extended period. The MBS buying program will end March 31 as anticipated, but this is of little consequence now that Fannie and Freddie have been NATIONALIZED and provides the administration with a slush fund of gargantuan proportions. We also saw the 5-year Treasury auction go very well with a strong bid to cover, but we caution that this variable can be subject to further review.
In addition to the Greek situation, it seems that the Chinese are growing suspect about a large purchase of Greek debt, even with a steep premium. The Chinese have been open in their desire to rebalance reserves away from the DOLLAR, but even they are getting cold feet. (Even though EURO-based Greek debt is yielding 6.73% on 10-year duration.) This is what created the huge selloff in the Greek market but this just confirms the point that the Chinese are becoming aggressive traders and will play the market to their advantage. The days of being the novice in the game is over! We warned weeks ago that the trading arena would become more difficult as the central banks become more aggressive and better participants. Also, a tip of the hat to Fed member TOM HOENIG for voting his principles. As it has often been implied by others, consensus is the last hiding place of cowards.