Let’s begin with Japan, where the Ministry of Finance conducted what turned out to be a surprisingly weak government bond auction.

“Reuters: – Japan’s Ministry of Finance sold 2.4 trillion yen 10-year JGBs to unexpectedly weak demand, pushing the spread between lowest and average bid prices to its widest in nearly 12 years.”

JGB yields spiked, with Japan’s 10-year bond now yielding more than the German equivalent – for the first time since 1989.

Apparently many Japanese insurers have stopped buying very long-dated JGBs. Furthermore, there is more supply coming from Japan’s corporate issues. But no worries, the BoJ will scoop all this paper up shortly.

Crude oil continued to trade higher, with Brent moving above $57 and WTI going above $54 at one point.

What’s going on? Apparently analysts have focused on the recent oil rig closures (discussed on Friday). But I would caution against becoming overly optimistic here. US production is still at record levels.

Moreover, the rig closures have been concentrated in the less efficient areas, particularly the vertical rigs. The more efficient rigs continue to operate, adding to the US supply glut.

More signs of deflation are showing up across the euro area. Here is the latest Italian CPI and the overall euro area PPI – both worse than consensus.

The euro bounced from the lows today as the potential progress with Greece resulted in some short covering.

Recently some ECB officials have threatened to cut off central bank financing for the Greek banks if Greece doesn’t “play nice” with troika. The next couple paragraphs describe the situation quite well.

“The Telegraph (Ambrose Evans-Pritchard): – A string of ECB officials have said in recent days that the institution would no longer accept Greek debt as collateral in exchange for loans after February 28, if Greece refuses to cooperate with the EU-IMF troika and walks away from its bail-out deal.

The move would cut off up to €54bn of liquidity currently keeping Greek lenders afloat. Syriza’s leaders are fully aware that this would trigger a banking collapse, full-blown default and ejection from the euro within days. Greek officials grumble that the ECB is acting as a political enforcer without treaty authority. Frankfurt has full discretion over how it sets its own collateral rules and can change them at any time regardless of what the rating agencies say.”

Now a quick note on Canada where the decline in longer dated bond yields has been spectacular.

This follows the declines in consensus 2015 GDP growth forecasts.


– Greece’s finance minister Yanis Varoufakis will meet Mario Draghi today with the hope of persuading him to maintain liquidity in Greece’s banking sector after the country’s EU bailout programme expires at the end of this month. (FT)
– The European Central Bank is already resisting Greece’s proposal that Athens raise EUR10bn by issuing short-term Treasury bills as “bridge financing” to tide the country over for the next three months while a new bailout is negotiated. Without this financing, Athens will exit its bailout without access to emergency funding for the first time since the first Greek bailout in May 2010. (FT)

– Jordan executes Iraqi militants The country hanged suicide bomber Sajida al-Rishawi and al-Qaeda operative Ziyad Karboli after Isis released a video claiming to show a Jordanian pilot being burnt alive. (Reuters)


– Dead Argentine prosecutor had drafted request for president’s arrest | Reuters
– Fees row masks bigger problems about UK university funding – FT.com. Almost half the money lent by the UK government to university students may never be repaid
– Turkey’s central bank governor under pressure over interest rates – FT.com
– Rich Chinese spending less at home, more in Europe
– Greek bond yields rise as ECB plays hardball – fastFT: Market-moving news and views, 24 hours a day – FT.com



For Greece, GDP-linked Debt May Be More Curiosity Than Cure

– Greece would replace some of its existing bonds, which pay interest, with bonds whose coupon is linked to growth in gross domestic product (replacing more debt with equity-like financing);
– Equity-linked finance also has positive incentive effects – it aligns the creditor more closely with the economic success of the debtor, and relieves some of the hardship that economic reversals inflict on the heavily indebted.
– Argentina issued bonds with growth-linked warrants after its restructuring in 2005;
– GDP-linked bonds face at least one formidable technical obstacle: the trustworthiness of the data on which payout is based;
– Brazil under-reported inflation in the 1980s to reduce payments on inflation-linked bonds, Mr. Mauro notes, and Argentina has systematically understated its own inflation.
– Debt is popular for a reason: investors like the certainty of payment. The uncertainty associated with equity is why there is an equity risk premium. Over time, equities must return more than bonds to reward investors for their greater risk. That makes equity a more expensive form of financing than debt, which is why companies lever up.


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