Thought of the Week: Curious Repetition

August 29, 2012

Most of the attention will be on the Jackson Hole speech and any hints of easing. We doubt much will come of it. So we're in for more drift.

-Christian Thwaites, president and CEO, Sentinel Asset Management

Dog Days of Europe 
There wasn't much news coming out of Europe. These caught our eye:

Greece had a bond payment in the middle of the week that was paid with no drama and then announced that it had enough cash to finance its needs through October. However, it is using cash set aside to recapitalize banks in order to meet general obligations. That's not good. The fiscal plans are in tatters and any consumer or business confidence at depression levels. Further bailouts will come but for now the best hope is to keep discussions going and hope that Germany continues to back the government.

The bond buying proposals are still priced into the market. One story has the ECB targeting a spread between Spanish bonds and Bund yields. This seems crazy. Spreads are now 506bp compared to a mean of 403bp and high of 640bp. Any spread target requires management of three variables: the price of each bond and the gap between them. The issue is Spain's absolute cost of borrowing not its cost relative to Bunds and, as we all know, you can achieve a spread target with very unintentional consequences, including a rapid sell off in Bunds. That surely won't work. By week's end the questions on how any program would work remained: which country, with what conditions, when, how much, sterilized or no, seniority issues and so on.


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