Notes From Underground: From One Italian Crooner to Another, That’s Life

The markets are playing with ECB President Mario Draghi. Just a few short weeks ago the suave performer of the ECB press conference only had to be concerned about being doused with paper confetti from an anarchist demonstrator decrying the dictatorial powers of the central bank. Post-ECB meeting, the BUNDS, OATS and BTPs made all-time highs in the futures and yields on German and French 10-year notes touched extreme lows. As the ECB paraded the success of QE the EURO currency was also trading at multi-year lows, 1.06 euros to the U.S. dollar.

Now all the work of the Draghi QE plan has been eroded as yields have climbed from 5 basis points on the 10-year bund to a close of 70 BASIS POINTS today. The euro traded back to the 1.13 level it was at when Draghi announced the QE program on January 22. The BUND futures are now trading below the low of 153.81 on the day of the ECB QE announcement. For all those in the technical realm, the 200-day moving average on the equalized active daily continuation is 152.50. We have traded through the moving average twice but have not yet closed below it.

Remember, the ECB has 60 billion euros worth of assets to buy for the entire month so the ability of President Draghi to inflict pain upon all those short bunds, OATs and BTPs is very great. I bring this to your attention because hell hath no fury as a central banker scorned. Watch for clues to ECB buying of sovereign assets. I doubt the ECB was active today because the U.S. bond and note rally failed to give a significant lift to the European bonds. Again, the ECB has a great deal of ammo left to cause short positions to run for cover. As my friend Norb B. often says: “The market’s job is to cause as much pain as possible.” So let the markets sing this wonderful song to Mr. Draghi:

That’s life,that’s what all the people say

You’re ridin’ high in April, shot down in May

But I know I’m gonna change that tune

When I’m back on top, back on top in June.

***The question haunting the global bond markets: Is there a lack of liquidity that is making the price movement so great? There may be some truth to the idea of the Dodd-Frank and global regulations causing some shrinkage of bank proprietary trading but I am not accepting the lack of liquidity argument so quick. Much of the liquidity theory is based on the lobbying efforts of the banking industry to negotiate some lessening of the Dodd-Frank regulations. I believe that much of the volatility in the bond markets has been caused by the run-up in central bank balance sheets and the compressed yields on sovereign bonds as a result of the QE programs. This means that pension and insurance companies have little room for error in their bond portfolios.

Buying BUNDS for 25 basis points leaves investors nervous about sustaining large capital losses if inflation were to rise above the central banks targeted levels. The markets are skittish and more prone to trying to move positions rather than hold to duration. It may not be a lack of liquidity but rather a herding of positions, especially because the central banks have accumulated such massive percentages of the market. Late last year I warned that 2015 would be a volatile year. I am off by a magnitude of …?

Tags: BTPs, Bunds, ECB, Euro, Europe, liquidity, Mario Draghi, oats, QE

This entry was posted on May 12, 2015 at 8:45 pm and is filed under Currency, Debt Market, ECB, Europe. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

2 Responses to “Notes From Underground: From One Italian Crooner to Another, That’s Life”

Blacklisted Says:
May 13, 2015 at 8:11 pm | Reply
“Is there a lack of liquidity that is making the price movement so great? ” Yes, and you haven’t seen anything yet.

Please explain what inflation metrics have you so concerned about inflation. If you’re concerned about the appreciation in tangible asset, then I would be concerned. However, that is not the data the Fed is driven by. BTW, no one will be wearing those Fed T-shirst a year from now, because the Fed is NOT data driven, They are image driven – which will be proven when they raise rates in the face of weak employment and no wage inflation, but a concern about being perceived as blowing another bubble in stocks (due to capital flows from the regions the US is destabilizing).

Have you not seen the record Christie’ auctions (of course you have). There’s plenty of cash, just no confidence in govt’s being good for their money. The short term paper is already dried up. I guess it will take a good scare in equities to drum up some demand for longer dated maturities. The search for bag holders continues.

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A.M. Look 5/13/15 | Says:
May 15, 2015 at 4:40 am | Reply
[…] shuffle. Time to be patient to see how things shake out. Yra wrote a great piece last night http://yragharris.com/2015/05/12/crooner/ Bond rallies in this environment have been supportive equity prices. Just something to ponder if […]

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Notes From Underground