European bonds were supposed to be in lock-down ahead of the Italian referendum but when it came to the Tesoro selling €1.5bn 10-year BTPs along with €1.75bn five-year notes and a mixed bag of 2022 and 2024 FRNs, there was no shortage of buyers.
In the event, the benchmark 10s flew out of the door, dragging the yield down from an opening level of 2.07% to 1.96% and pulling the spread to the 10-year Bund back to 174bp.
This was not entirely driven by what looked to be decent relative value but also by some very clear messages coming out of the ECB that it would not permit stability to be disrupted within the eurozone bond complex and that sufficient funds would be made available to counter any stormy post-referendum action. That sounded rather like another one of St Mario’s “whatever it takes” approaches and clearly a few of the erstwhile bolder position takers lost their bottle. Only very few of have so far got the better of the ECB as Draghi has obviously paid heed of Theodore Roosevelt’s piece of advice that one should speak softly and carry a big stick.
The closer the referendum comes, the less I am worried that the outcome, even if it is as forecast a no, will bring with it anything like the doomsday repercussions that many had predicted. I was exchanging notes with one of my many low friends in high places yesterday and again the matter of the future of the eurozone arose. My conversation partner pointed out that a senior ministry official had once commented that no currency union had ever survived but in general they hung on for forty years before collapsing. As the euro was only introduced in 1999, one could at best or at worst only conclude that we are “17 down, 23 to go”.
Oil slick
Back in Vienna, OPEC continues to generate enough hot air to replace its own entire daily output. Borrowing from Jean Claude Juncker, the muppet-in-chief’s famous comment and adapting it, one could summarise the conundrum as “we know what we have to do; we just don’t know how to pay our bills once we have done it”. Saudi, having spent trillions over the past decades on fast jets and other toys while having invested next to nothing in the future, is suddenly trying to make up for lost time and now faces financial commitments it cannot meet. Iraq and Iran have significant infrastructure shortfalls that they have urgent need of overcoming. How to square the circle? I am not privy to the inner workings of OPEC but my guess is that some under-the-table agreement will be reached between the three of them which ends up with a grand public statement that they have resolved their differences and have agreed to production quotas. In private they will pump more or less at will while never questioning each other’s published statistics in a sort of “don’t ask, don’t tell” fashion.
There is, irrespective, a sting in the tail. At current prices of below US$50 per barrel, new investment in exploration and exploitation has dropped off a cliff, raising the spectre of a supply shock at some time in the future. This is the whip with which OPEC is trying to threaten consumer nations although with developing shale gas and oil tar technology, its power is diminishing. There are so many moving parts in the oil business now that OPEC, founded and structured when it was still not much more than a one-trick pony, cannot cope. What will not go away, however, is Saudi Arabia’s profligate cost of living. It didn’t borrow US$17.5bn in the markets for fun or in order to, as the old cliché has it, “create a benchmark reference curve”. That said, the bonds have performed admirably with the 30-year tranche, having been issued at a spread over treasuries of 201bp, now trading at 168bp over the comp. It’s amazing what as 4.5% coupon can do in a yield-starved environment.
So I guess we should be prepared for a statement out of OPEC that agreement has been reached and that all is well in the garden but we would be best advised to believe a word of it. I would be interested to know how many production cuts and quota agreements have been announced since the beginning of the century and how many of them have been kept.
New roles please
Although it seemed done and dusted as early as last week, it looks as though Steven Mnuchin and Wilbur Ross are now finally going to be officially appointed to their future roles as Treasury secretary and commerce secretary, respectively. Both have in reality been given hospital passes as they try to strike a balance between telling America’s partners how much things are either going to change, or have already, while steering their boss into understanding where the limits to those changes have to be pinned.
The Donald will surely need to pump up borrowing in order to fund his New Deal but it will be up to Mnuchin to find the buyers for all the new Treasury paper. I wonder whether, as an old Goldman Sachs staffer, he’ll have thought of arranging to do this on a hard commission basis? Apart from that, he will also be tasked with reviewing Dodd-Frank, another Trumpian case of quite deliberately placing the fox in charge of the hen house.
Back in France, the mist is clearing now that François Fillon has taken the Republican crown. The latest polls suggest, not to any great surprise, that in a run-off against Marine Le Pen he should triumph by a margin of roughly 2:1, so not a dissimilar outcome to the run-off between Marine’s father, Jean-Marie and Jacques Chirac in 2002 albeit that Le Pen senior only polled 18% in the second round, handing Chirac the biggest majority ever achieved. At the time the graffiti read “the crook or the fascist?”. Remarkably, if you turn the “n” in Fillon upside down, you get Fillou – or if correctly spelt filou, which translates literally as “swindler, cheat, confidence man, crook, double-dealer, fraud, imposter, impostor, trickster”….
Oh dear, oh dear.