Just 10 days ago, it was announced that holders of Greek sovereign debt will take a 50% haircut. Everyone was basically told that if they don’t agree on a 50% loss, they will have to take a 100% loss. And since the debt reduction was “voluntarily”, Credit Default Swaps on Greek Sovereign Debt did not trigger.
CDS is basically an insurance against bonds going bad (or against defaulting). While it is true that many of the participants in the CDS market are speculators and don’t own the underlying bonds, the not triggering of those instruments is a mistake of major proportions and with potentially detrimental consequences.
If the holders of debt in question are not easily able to hedge, it is perfectly rational to assume that they will not only buy less, but also decrease their exposure. The effect: the yield on Italian and Spanish bonds are near records highs despite the ECB buying directly, which essentially endangers the solvency of two of Europe’s biggest economies.
Personally I think that the most likely solution here is for the ECB to commit to even bigger purchases or with other words, to monetize the debt. The Germans might not like this scenario, but it might be the lesser evil at this point of time.
Despite the spike in yields, U.S. equities are holding the front in a spectacular fashion. As The Fly eloquently noted in one of his posts today: “when stocks don’t go down on bad news, good news is likely around the corner”. Whatever the reason, the resilience of equities is a big tell of current supply/demand dynamics. Gold, Energy and Tech are leading the way so far and just want to move higher.
I am not in a hurry to open any new positions at this point and I am patiently waiting for high probability trades to reveal themselves. Some days are better spent just watching, reading and writing. Out job is to make money, not to trade.