LONDON, Nov 21 (Reuters) – Renewed credit turmoil and volatility led the European Covered Bond Council (ECBC) on Wednesday to suspend inter-bank market-making in covered bonds until Monday, Nov. 26.
The move is a sign of the stress in the covered bond market, which is dominated by German institutions that have almost a trillion euros of covered bonds outstanding.
Translation: SachsenLB and Rhinebridge Plc were the tip of the German CDO/SIV iceberg. Germans are on the hook for a lot of the toxic debt that’s still constipating the global financial system. European regulators are trying to help them by freezing the market. It will not work.
“In light of the current market situation and in order to avoid undue over-acceleration in the widening of spreads, the 8-to-8 Market-Makers & Issuers Committee recommends that inter-bank market-making be suspended,” the ECBC said in a release. Market-maker obligations to investors will remain unaffected.
“It’s good for the market,” said Christoph Anhamm, head of ABS and covered bond research at ABN AMRO in Frankfurt. “It gives the market time to think.”
This kind of comment is usually true in a very narrow sense. But other market participants know that somebody is tweaking the rules to stave off a reckoning, which makes the entire market even more jittery and panic-prone than before. Traders quite commonsensically either stop trading, or trade very bearishly, until they see a lot of blood in the water. When there are piranhas and bleeding whales all around you, you get out of there and throw dynamite into the water until a lot of corpses rise to the surface before getting back in.
The suspension may run longer than Nov. 26, he said.
“Due to general market conditions and the specific mechanics of the inter-dealer market making it even seems possible that inter-dealer market making will not be resumed this year,” Anhamm said.
Wow. Just wow. (My advice: eject eject eject!) They just basically shut the market down for a completely indeterminate period of time. Something is really, really, really wrong here.
The Ted spread–the rate differential between Treasuries and eurodollar deposits (eurodollar deposits essentially pay Libor) is still around 200 basis points. This is 1981/1987-league. The fact that we aren’t seeing dead whales rise to the surface in proportion to the magnitude of this crisis means that huge liquidity pools (probably some hedge funds and banks in Germany, the UK, and the US) are desperately reaching for cash even as they refuse to fess up to their losses.
According to the indispensable Markit, CMBS AAA spreads are now twice as high (twice as risky) as they were at the height of the August swoon. ABS AAA securities dropped approximately 10 percent in August, from 100% of par to 90%, and this was seen as a harbinger of the apocalypse; the same AAA’s are now trading under 70 percent of par. It’s not clear to what extent the ABX is even functioning anymore (apparently there wasn’t enough interest to launch a new ABX roll, although the CMBX did issue another batch). But in any case, the Ted spread, CMBX, and ABX are all telling the same story, as are Markit’s credit default swaps.
The derivatives markets are in utter meltdown, on a scale that has not occurred in my professional lifetime.