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If Spain 10 Year > 7.50% Then LTRO 3

Tyler Durden's picture


At least that is the bogey according to JPMorgan's Pawan Wadhwa, who in a note announced that the ECB may resume SMP purchases if the 10 year hits 6.5% (as in a few hours), much to the chagrin of Germany, which was foosed into believing LTRO 1+2 would mean no more SMP purchases. More importantly, since the 6.50% barrier will be taken down with impunity in days if not hours, and the SMP has proven time and again to be powerless to prevent mass selling, the next big bogey is 7.50% at which the ECB will likely announce another 3-year Discount Window bazooka, pardon, LTRO. What JPM does not say is that with the halflife of each successive LTRO getting cut in half, LTRO 4 will be needed in June, LTRO 5 in July, LTRO 6 in July, LTRO 7 in July and so on. Most importantly, now that banks, who are desperate for some cash infusion from either the Fed or the ECB, know what the critical threshold bogey for action is, they will be sure to facilitate the ECB's life, and send Spanish 10 Years plunging to at least 7.50% and demand Draghi play ball, again. In other words: now that the market knows what the consensus is to get more European QE, it will promptly do it. After all the LTRO was never for the benefit of the countries: it was always and only to benefit Europe's insolvent banks. If that means "Greecing" Spain in the process, so be it.

And some other observations from Wadhwa, via Bloomberg:

  • Stay short peripherals with stop at 5.75% in 10-yr Spain, targeting for 6.25% or spread target of 450bps
  • Specifically recommend to exit peripheral shorts if Spanish 10-yr yield hits 6.25% due to heightened risk of policy response
  • Stay in 3/9 Spanish curve flatteners vs Italy and sell short-dated Spanish CDS-cash basis
  • Domestic banks have reasonable firepower to support sovereign bonds though large upcoming redemptions for Spanish banks suggest their support for sovereigns may be limited
  • Although EFSF now has ability to buy sovereign debt, meaningful EFSF bond-buying program unlikely 
  • Given ECB’s reluctance to use SMP in size, reigniting domestic banks’ demand is only meaningful way to stabilize sovereign spreads in long-run
  • Recommend to position for 5/10 German curve flattening
  • Close Italy overweight vs. Spain after Spanish auction

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Mon, 04/16/2012 - 07:24 | 2348062 silver500
silver500's picture

"Now that the market knows what the consensus is to get more European QE, it will promptly do it."

On the other hand if the market knows that 7.5% will lead to more LTRO then how can it get to 7.5%?

Financial stability by paradox...

Mon, 04/16/2012 - 07:26 | 2348067 Tyler Durden
Tyler Durden's picture

By selling.

And by recalling that he who sells first, sells best.

Mon, 04/16/2012 - 07:26 | 2348069 The Limerick King
The Limerick King's picture



How will the markets react

If the EU refuses to act

The auctions in Spain

Will go down the drain

The 10 year will likely get sacked

Mon, 04/16/2012 - 08:05 | 2348113 Thamesford
Thamesford's picture

The drain from Spain will be hard to contain!

Mon, 04/16/2012 - 08:09 | 2348120 Thamesford
Thamesford's picture

The drain from Spain will be hard to contain!

Mon, 04/16/2012 - 07:28 | 2348074 dannyboy
dannyboy's picture

This means Thursday is going to be extra fun! The kindling is already down, all it needs is a match and up it goes woo.

The only thing I worry about is how far will the ECB go in crushing periphery bond holders in order to keep this thing together.. They got away with it once in Greece, I don't think the ECB can do it again so easily.

Mon, 04/16/2012 - 07:37 | 2348087 silver500
silver500's picture

The ECB will eventualy do all it can to keep it together, each round the pressure on the ECB will be greater from both sides.  However belive me the ECB can and will do this many more times.

Mon, 04/16/2012 - 07:33 | 2348083 I should be working
I should be working's picture

Because every buyer before the ECB makes its move will lose money. It's like buying stocks before QE3 is announced, sure you could do it, but why would you want to?

Mon, 04/16/2012 - 07:27 | 2348068 Dick Darlington
Dick Darlington's picture

But but but, the unelected mao-extremist is still very CONfident:


Oh and here's what Germany answered to France after Sarcozy started to beg ECB monetization again:




Mon, 04/16/2012 - 07:29 | 2348073 CryingBear
CryingBear's picture

i think the tylers are great writers are very funny but i think their imagination runs too wild. why would banks sell until 7.5 when its just as bad for them. i doubt banks would borrow just to buy bonds as it is too risky so why would there be LTRO 3 when the ECB knows there is no point. germans will just give in into common bonds with ECB QE. sheeba

Mon, 04/16/2012 - 07:57 | 2348106 Ghordius
Ghordius's picture

I agree though with a caveat: CDSs add to this "simple game" of producing a new scare shortly before a bond auction (and so driving the yields up for extra "milking") a few additional dimensions, for example there are several funds who add the underlying bonds to their longer-held CDS portfolio for the case of cashing in in the credit event without looking like a pure speculator (and getting some hastily made law against you), and by doing so they drive yields down.

Meanwhile you also have several derivatives that are triggered by a high yield, of let's say 7.5. And countless OCT (private bets) of all kinds. No, if you don't have the hot intent information, the databases, the multidimensional models and the geeks to ride 'em you are blind in this environment - same as the Tylers are showing us in the realm of HFT.

And so you have a market that historically was a straightforward pull-of-war between buyers and sellers that has morphed into a multi-sided/dimensional struggle where some are buyers, some are sellers, some are insurers, some want a hedge and several parties of speculators with several scenarios they try to produce - including some sovereign armageddon that can only averted by more taxpayer money.

Interestingly, no "market fundamentalist" will ever see that CDSs are at any fault. Sometimes I wish Buffet never made that WMD quip, he was the absolutely wrong person to tell the emperor that he has the wrong clothes on for this season...

Mon, 04/16/2012 - 07:33 | 2348077 I should be working
I should be working's picture

Yeah Germany will voluntarily go with Euro bonds, right.

Mon, 04/16/2012 - 07:44 | 2348092 CryingBear
CryingBear's picture

the rest of the EU could just bring up WWI and WWII.

Mon, 04/16/2012 - 07:31 | 2348078 Gatts
Gatts's picture

once the junkies know how to get their fix...

Mon, 04/16/2012 - 07:30 | 2348080 CryingBear
CryingBear's picture

and me no understand why SMP isnt called QE.

Mon, 04/16/2012 - 07:36 | 2348086 cossack55
cossack55's picture

Familiarity breeds contempt.

Mon, 04/16/2012 - 07:59 | 2348091 IToldYouSo
IToldYouSo's picture

because that would give the game away....

same as why QE isnt explicitly and officially called money printing

Mon, 04/16/2012 - 07:36 | 2348085 Catullus
Catullus's picture

If(Greek Bond Yield > .075, LTRO 3, "")

Mon, 04/16/2012 - 07:47 | 2348094 IToldYouSo
IToldYouSo's picture

If(Greek Bond Yield > .075, LTRO 4, "")

If(Greek Bond Yield > .0725, LTRO 5, "")

If(Greek Bond Yield > .07, LTRO 6, "")

If(Greek Bond Yield > .0675, LTRO 7, "")




because every sentient mind understands this is unfixable

Mon, 04/16/2012 - 07:53 | 2348103 francis_sawyer
francis_sawyer's picture

"sentient" minds... Aaah the memories...

Mon, 04/16/2012 - 08:00 | 2348109 IToldYouSo
IToldYouSo's picture

yeah, like a cold cider on a hot summers day (dreamy look in eyes)

Mon, 04/16/2012 - 08:20 | 2348122 DutchR
DutchR's picture

Timewave Zero territory.

Mon, 04/16/2012 - 08:43 | 2348157 mayhem_korner
mayhem_korner's picture



I understand the IMF is auctioning the pole position for the race to the exits...

Mon, 04/16/2012 - 10:18 | 2348400 sschu
sschu's picture

Who would think to buy Spanish 10 year bonds?  As an investment, that is.

Hedgies are working these guys again, the pattern is all so predictable.  

