Following a series of modestly successful debt auctions out of Europe, primarily in Spain and Greece, the morning capped its positive tone after the EFSF managed to sell €2 billion of 3 month deals: an event to which the EURUSD popped by 40 pips as apparently investors do not expect the EFSF to go insolvent in 91 days. However, the positive mood was quickly wiped out after Reuters reported minutes ago that private bondholders have concluded talks in Athens without reaching a deal, which confirms that that very basis of the July 21 deal, not to mention its October revision, the NPV "trim" of Greek notional bonds, is and continues to be elusive, which means that Europe's banks are certainly unable to still take even a 50% haircut, despite all protestations to the opposite namely that everyone has cut their Greek exposure. In other words, Europe's banks have, once again, lied to everyone. And rounding up the sour note of the morning is the breaking out of Liege, Belgium where one or more attackers are said to have thrown Grenades at a bus stop, with at least 2 people confirmed dead and 10 wounded. Unfortunately, the deadly anger is spreading ever closer to the core of Europe.
Le Soir with more on the deadly attack:
Two people were killed and at least a dozen were injured in the heart of Liège, according to a first assessment. Several people have hurled grenades and fired into the crowd. Follow the live situation
An individual of forty years has launched several explosive devices in the direction of a bus shelter, located on the Place Saint-Lambert, where many people were present.
Four explosions were then heard and gunfire.
An initial assessment, interim reports of two deaths and a dozen injured.
One of the authors of the attack committed suicide.
Place Saint-Lambert was closed
As for the EFSF sale, here is Peter Tchir with his explanation:
The market popped after the EFSF announced completion of a sale of just under 2 billion euro of 91 day bills. The good news I guess is that it came at the ultra low yield of 0.22%.
Why are they doing 91 day bills for EFSF? The point of EFSF is to address the liquidity part of the European sovereign debt problem. The EFSF does absolutely nothing to address solvency issues, but it can help with liquidity and rolling over existing debt. But what is the point of 91 day EFSF paper?
The "bazooka" version of EFSF was meant to be long dated with leverage. Leverage doesn't seem to work, but what happened to long dated? The EFSF should be borrowing long term in order to provide financing for weak countries. This is merely adding to the roll risk problem. Now with whatever sovereign debt that needs to be rolled, Europe will have to roll EFSF paper.
If downgrades are coming (and it seems like Fitch, Moody's, and S&P are moving in that direction), why would you not try to lock in more money at longer terms now?
The market can rally on this news, but it is a blatant attempt to try and make something sound positive, when the reality it is yet another bad decision, in a long line of bad decisions, relating to EFSF. If they had raised 10 billion of 5 year money at 2.2% (France's yield) I would be more excited that they are doing the right thing longer term. This is just for show and in the end is going to add to the liquidity problem, rather than addressing it.
The ECB "unlimited" 3 year money seems to be having some effect. Curves are steepening, but in a weird way. Italian 2 year yields are 26 bps better, the 5 year is unchanged, and the 10 year is 10 bps HIGHER. I would not have guess that with the 2 year 26 bps better, the 10 year would actually be worse. That is a strange move and is likely distorted by the "unlimited" 3 year money.
Spain also came with short paper (1 year and 18 month). More respectable than the 91 days but again, sticking to that the 3 year and in theme.
Europe, and the EFSF in particular, should be locking in longer term financing, not going for the easy short term roll. It is not a solution to their solvency problems, and is not helping the liquidity problems.
Maybe we rally more as investors get excited about a possible Fed Holiday Season present, but don't view the EFSF auction as much of anything (other than a sign that they really don't know what they are doing).