Speculators Not Wagering Much Against Periphery Country Eurobonds

Given how many commentators believe that Greece is destined to default on its bonds (particularly since they are subordinate to any new money from the IMF and EU), you’d think they’d be putting their money where their mouth is.

But the old saw in the US is “don’t fight the Fed”. And the same logic appears to apply with the ECB. John Dizard of the Financial Times reports that perilous little in the way of CDS contracts is being written on everyone’s favorite sovereign default candidate (although the leader of Fine Gael, which will be leading the new coalition in Ireland, fired a shot of sorts across the bow of the eurozone officialdom). From Dizard’s article:

The truth is that the outstanding net CDS volume on, for example, Greek sovereign risk is less than 2 per cent of the outstanding state debt. That’s less than $6bn on about $490bn, for the dollar denominated contracts. There is more liquidity in the dollar contracts, which, given the location of many hedge funds and relative lack of official hostility to the instrument, makes sense. Even so, the derivatives tail, far from wagging the dog, is really vestigial.

The hedge funds and remaining prop trading desks are well aware of euro area official hostility to derivatives that provide a way to bet against policy. So if there are bets to be made, there won’t be many through the CDS market.

Even in the market for actual bonds, there is a reluctance to put on short positions that could be subject to official squeezes on the freedom or cost of borrowing securities. Also, with an announcement of some proposed debt crisis solution coming around the time of the March euro area summit, there could well be another short term pop in the price of peripheral market debt. Why take the risk?

Despite the lack of aggressive short selling, or buying of protection through CDS, the price of peripheral country bonds drifts lower, as real-money end buyers continue to try to be real-money end sellers. They have not, however, drifted anything close to low enough to make possible any meaningful debt relief through official buybacks. For that you can thank the ECB’s repo facilities and purchases, which have artificially kept up the price of Greek law-governed paper.

Note that this does not mean traders won’t find a way to play periphery country tsuris. It just is not likely to have sovereign debt as its centerpiece. Given that the sovereign debt crisis is deeply entwined with the efforts to prop up the banking sector, you can guess one of the first places they might look for interesting wagers.

Print Friendly, PDF & Email


  1. a

    “although the leader of Fine Gael, which will be leading the new coalition in Ireland, fired a shot of sorts across the bow of the eurozone officialdom”

    And Finland fired back. See Bloomberg’s “True Finns Threaten Debt Bailout Plan as April Election Nears.”

  2. Daniel de Paris

    I wonder whether this kind of post – quietly in support of the CDS conundrum – has its place on a “nakedcapitalism” forum.

    Banksters are using the massive “central bank” liquidity support to “play against” sovereign credit on those “so-gennante” (as in the “So-gennnante DDR”) credit re-insurance markets.

    CDS belong, as much as CDO, to the dustbin of financial history.

    No I do not buy in that idea that some of the biggest insurance corporations such as AIG are active in this “market” :)

    I understand the answer. In case this CDS market is not working, who would offer GM credit (personal remark made to me in 2007 a banker who happens to be a relative)? Who who lend to that bankrupt country?

    What the hell is this market that allow credit-unworthy entity to get credit because some kind of support is given by CDS!

    There will be no return to monetary and financial normalcy until CDS markets are dismantled. I expect bloggers who do not trade as a business to stop pushing CDS as “normal business tools”. They plain aren’t so.

    Call me a dumb Volcker-ite, I do not care.

    1. Yves Smith Post author

      Saying that CDS volumes against Eurosovereigns are modest is not tantamount to approving of CDS. I’ve written a lot against CDS, but thumping on them every time they come up, particularly in an instance where there is too little action for them to cause harm, strikes me as running the risk of looking obsessive (as in using any news tidbit where the CDS shows up to say. “Oh they are terrible!” when that particular news item does not support that argument).

  3. Rolf G

    Hi Yves,

    you are mistaken, when stating, that money lent by the EU is senior to Greeces own bonds(at least when let through the EFSF).
    The EFSF quite clearly states as much in its own FAQ:

    “A10 – Will the EFSF be a preferred creditor?
    No. Unlike the IMF the EFSF will have the same standing as any other sovereign
    claim on the country (pari passu). Private investors would be reluctant to provide
    loans to the country concerned if there were too many preferred creditors.” (http://www.efsf.europa.eu/attachment/faq_en.pdf)

  4. Bruce Krasting

    Greek 10 year is 11.8. German ten year at 3.20. The difference is 8.6% per annum. A giant wall to climb if you are a spec.

    I play this game with 80% leverage. Big shots play it with 90%. The really big guys do it with no money down at all.

    With five to one leverage the cost to finance a short Greek position is a raw cost of 3.5% a month. By itself this is a big nut.

    That is a very big price to pay. So spec guys like me are going away and looking for a different way to make a buck.

    We will be back. The Euro bond short is a timing trade. What it means is that when (if) the next speculative attack happens the moves in the underlying bonds will be that much more vicious. When you have no players. Volitility goes up.

Comments are closed.