Ares
9th August 2011, 06:32 AM
Asking almost any credit trader how their market is trading, and the most common answer is broken. Yesterday, a few people would have said bidless, or ugly, but today, its just broken. Liquidity is extremely low. Every trade resets the market. Trades are being driven by fear and fear alone. Fear of a further sell-off. Fear of whipsaw. Sovereign debt trading was the first to be hit, and it has now hit all the credit markets. Even equities seem to have seen a complete breakdown, with big air pockets. For the S&P, 5 points seems to be just a little noise every few minutes waiting for the next big move. S&P futures have already traded in a 70 point range, not too big for a month, but a lot for 12 hours.
Yesterday's winners still seem to be doing well. Gold, up big, again. Even more interesting, is that Spanish and Italian 10 year bonds are performing again. Spanish 10 year bonds have traded below 5% at times. It had been a smart trade to fade ECB intervention, but with everyone realizing that we are hitting the wall here, they seem to be putting in more effort. I am impressed that yields in those countries have moved well over 1% in 2 days, and am surprised they have been able to stay there. The CDS market doesn't feel quite as strong as the bond themselves, but they are subject to less direct central bank intervention. It still feels like no one believes the rate improvement will be sustained. At some point, once the dust settles, someone should examine how much trading was require to move rates this much. To get a move of 1% across the curve of 2.2 trillion euro of combined debt, how much had to be bought? I am scared that the number is low, showing that this isn't really a market. If rates in 5 years were moved by 25% (5.5% to 4.5%), you would like to think a reasonable amount of the float had to change hands. I have always been a big fan of mark to market, but that was assuming there was a market.
So anyways, keep an eye on those two countries. The longer they hold, the more hope that Europe has of stopping the contagion talk, at least maybe until next weekend. I remain convinced, that if the markets don't stabilize by then, the German's in particular, may not provide the tranche of money Greece needs for it's August 20th maturities and interest payments.
Any tightening so far, is purely short squeeze or fast money. IG16 and HY16 index trading better. IG16 feels most "squeezy" but that makes sense as people were buying protection on that because they couldn't stomach buying protection on HY16 which was experiencing one of its worst single day declines ever (maybe its worst ever). HY16 is only okay, up not even a point, showing it is a bit of short covering, but not a real risk on rally. It should be outperforming by a lot more if this was risk on.
BAC is another prime example. It was almost 50 tighter at one point this morning, though leaking a bit. It is quite possible that too many people were lifting offers with dreams of sugar plum fairies and defaults in their head. It is unlikely to be that simple or that quick - if anything should have be learned from 2008, it is that banks in particular have more ways than most to avoid default. This gap tighter will squeeze out some weak or silly shorts. In any case the magnitude of the moves does not truly reflect that large of a sentiment. It seems like every 10 million trade pushes the market 5 bps and the good traders wait for the turning point, so there are only sellers on the way tighter, and only buyers on the way wider. Again, the market is broken. Before anyone jumps on some anti-cds bandwagon, I think the cash market is even more broken. The bond market looks at the CDS market with envy. There are actually two way markets and trades occuring.
Well, it seems to me that we should just go home until closer to 2 pm. It is unlikely that anything big happens before then, and all you will do is stare at the screen trying to determine what every tick is telling you. Does a price move mean someone knows something? (not a horrible assumption when it comes to a government rife with leaks). In the end barring any headline, we will likely just chop ourselves around until the Fed either launches some new stimulus program or it's lights out for the market as expectations of aggressive Fed policy are certainly hoped for if not priced in.
http://www.zerohedge.com/news/market-commentary-broken
Yesterday's winners still seem to be doing well. Gold, up big, again. Even more interesting, is that Spanish and Italian 10 year bonds are performing again. Spanish 10 year bonds have traded below 5% at times. It had been a smart trade to fade ECB intervention, but with everyone realizing that we are hitting the wall here, they seem to be putting in more effort. I am impressed that yields in those countries have moved well over 1% in 2 days, and am surprised they have been able to stay there. The CDS market doesn't feel quite as strong as the bond themselves, but they are subject to less direct central bank intervention. It still feels like no one believes the rate improvement will be sustained. At some point, once the dust settles, someone should examine how much trading was require to move rates this much. To get a move of 1% across the curve of 2.2 trillion euro of combined debt, how much had to be bought? I am scared that the number is low, showing that this isn't really a market. If rates in 5 years were moved by 25% (5.5% to 4.5%), you would like to think a reasonable amount of the float had to change hands. I have always been a big fan of mark to market, but that was assuming there was a market.
So anyways, keep an eye on those two countries. The longer they hold, the more hope that Europe has of stopping the contagion talk, at least maybe until next weekend. I remain convinced, that if the markets don't stabilize by then, the German's in particular, may not provide the tranche of money Greece needs for it's August 20th maturities and interest payments.
Any tightening so far, is purely short squeeze or fast money. IG16 and HY16 index trading better. IG16 feels most "squeezy" but that makes sense as people were buying protection on that because they couldn't stomach buying protection on HY16 which was experiencing one of its worst single day declines ever (maybe its worst ever). HY16 is only okay, up not even a point, showing it is a bit of short covering, but not a real risk on rally. It should be outperforming by a lot more if this was risk on.
BAC is another prime example. It was almost 50 tighter at one point this morning, though leaking a bit. It is quite possible that too many people were lifting offers with dreams of sugar plum fairies and defaults in their head. It is unlikely to be that simple or that quick - if anything should have be learned from 2008, it is that banks in particular have more ways than most to avoid default. This gap tighter will squeeze out some weak or silly shorts. In any case the magnitude of the moves does not truly reflect that large of a sentiment. It seems like every 10 million trade pushes the market 5 bps and the good traders wait for the turning point, so there are only sellers on the way tighter, and only buyers on the way wider. Again, the market is broken. Before anyone jumps on some anti-cds bandwagon, I think the cash market is even more broken. The bond market looks at the CDS market with envy. There are actually two way markets and trades occuring.
Well, it seems to me that we should just go home until closer to 2 pm. It is unlikely that anything big happens before then, and all you will do is stare at the screen trying to determine what every tick is telling you. Does a price move mean someone knows something? (not a horrible assumption when it comes to a government rife with leaks). In the end barring any headline, we will likely just chop ourselves around until the Fed either launches some new stimulus program or it's lights out for the market as expectations of aggressive Fed policy are certainly hoped for if not priced in.
http://www.zerohedge.com/news/market-commentary-broken