Sunday, November 29, 2009

Still Fenced Off

A couple of months ago, we posted a piece remarking on how resilient markets were in the face of what could be interpreted as bad news all round - specifically referring to disappointingly priced (at least to the seller) asset sales by Ferrovial and Caja Madrid. Fast forward eight weeks and we see the same being repeated, although with considerably less conviction on the part of the status quo.

We could easily be talking about the very noisy, but finally nil, Friday reaction to credit events in Dubai (we believe that this is the third year in a row that something has come apart badly on the American Thanksgiving holiday), but Greece is what interests us more.

No surprise to followers of the third chart in our right hand sidebar who would have noticed a marked lack of synchronization between that country and the rest since late September, the yield on the Greek 10-year soared to around 210 bps above the bund on Thursday - returning to levels not seen since last spring. The only others to really react, but not so violently, were Ireland, Italy (which are the only two to register actual increases in actual coupon) and to a lesser extent, Portugal. Obviously, disregarding these first two, the main culprit behind generally widening spreads is the demand for German debt. Possibly a result of safe haven investment in a volatile currency/equities environment, the bund return has shrunk a full 22 bps in two weeks.

Even though it seems that local crises remain thought to be isolated outbreaks, one has to wonder about the action in Greek debt. At the height of the credit panic, when it was thought that both Greece and Ireland were verging on default and spreads widened to just shy of 300 in both cases, the ECB came out and plainly stated that no EMU state would be set adrift. Has anything changed? Are we missing something? Or are buyers of CDS on Greek debt at these levels being a touch hopeful?

David Murphy, possibly urged on by our comments to this post, may have decided to sell protection against a Greek default at 200-plus. If so, he was rewarded with up to 20 points on day one - kiss of death that immediate positive results might be.

As an aside, David also provided about a year ago a nice, succinct explanation as to why CDS spreads are not calculations of probability of default, at least in the case of sovereign debt.



Colin said...

Finally, you and Ambrose agree on something. I think. Greece is a worry. I can relax now.

bsanchez said...

Oooops, Colin got you wrong. Charles never worries (OK maybe about the harvest, but not Eurozone sovereign debt or property market crashes). He tries to compensate for the Edward Hughs and Ambroses of this world.

Anonymous said...

Ha! I still think it is a good position on the basis of the original logic: great compensation for a very unlikely event. But you are right, the mark to market is ugly. Fortunately I only ever use mark to myth on my fantasy positions...