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The Resource for the Global Finance Profession

This Week in Corporate Finance: ECB Intervention Causes Disparate Reactions

  • By Brian Kalish
  • Published: 2011-12-28

This article was excerpted from the latest issue of EconWatch, a summary of the latest economic data releases from the previous week.     

Read the full report.  

You know it has been an interesting week when those in the media start throwing around the word “rehypothecation.” I have a similar reaction when the folks on CNBC, Fox Business or Bloomberg TV mention “Commercial Paper” or “The LIBOR.” It is the general feeling that someone is reading the words off the teleprompter but the speaker has no idea what it is.

At the start of the week, money flowed into U.S. and German government securities, as investors were nervous about a liquidity crunch in Europe and political uncertainty in Asia. That trade was quickly reversed on Tuesday as the market responded positively to news of a successful Spanish bond auction and a stronger-than-expected German confidence report, combined with stronger U.S. economic indicators. The U.S. stock market was up nearly three percent as money moved out of the safety of Treasuries.

The big news of the week was the injection of 489 billion euro ($636 billion) into the European banking system via three-year loans provided by the ECB. This amount was substantially greater than the expected amount of 293 billion euro, and was even larger than 442 billion euro the ECB injected into the system back in 2009. The markets initially cheered the news of the intervention, but that cheer slowly morphed into a bit of gloom as the day progressed. Investors became concerned that the magnitude of the intervention indicated greater liquidity problems in the European banking system than had been previously perceived. Some market participants are referring to this action by the ECB as a “backdoor Eurobond.”

On Thursday, the flow of good economic news out of the U.S. continued. The Initial Claims report surprised the market by dropping again, this week by four thousand to 364k. This was the lowest level for claims in over three years going back to April 2008. There seems to be a growing bifurcation between the health of the U.S. versus the European economy.

Net-net, for the week we witnessed a significant backup in U.S. Treasury yields as the two-year note was up 5bps to 28bps (after being as low as 23bps); the five-year note was up 18bps to 98bps (after being as low as 79bps); the 10-year note was up 17bps to 2.02 percent (after being as low as 1.80 percent); and the 30-year bond was up 21bps to 3.06 percent (after being as low as 2.78 percent).

There continues to be year-end pressure in money-market land. The three-month LIBOR rate continued its recent ascent to close at 57.58bps, its highest level since July 2009, the LIBOR-OIS spread is at 48.1bps, and the TED spread is at 58.08bps, the widest it has been since May 2009.

Germany continues to be the beneficiary of continued uncertainty in Europe. While most European sovereign yields were lower this week, the German two-year note actually touched its all-time low yield of 20bps, as it is perceived as one of the truest safe-havens available.

Italy continues be a focus of credit-risk for investors. The Italian 10-year bond yield passed the seven percent threshold again, to climb as high as 7.09 percent, before closing the week at 6.98 percent.

Greece continues to battle against the market’s belief that a default is inevitable. The Greek one-year note reached an all-time high yield of 379.29 percent, before sliding marginally to settle at 376.40 percent; the two-year yield climbed as high as 152.14 percent; and the Greek 10-year bond hit a record high yield of 36.11 percent before easing a bit to close at 34.95 percent.

As we head into the last week of 2011 (albeit a holiday-shortened week), most investors will be trying to avoid any last-minute hiccups and trying to close the year in no worse shape than they are today. A happy and joyous holiday season to all!

Copyright © 2015 Association for Financial Professionals, Inc.
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