Italy Bond Auction Fails to Match Spain Success

The banking system can’t fund all the euro member nations under current regulatory restrictions, including capital requirements and diversification rules.

The 3 year variable rate funding from the ECB may have helped some banks with room on their balance sheets, but with general liquidity concerns, buy more national govt debt, but that would be a one time adjustment. Once the banking system is ‘topped off’ it only buys more national govt bonds to replace maturing issues, or to add to its balance sheet should its capital increase.

Italy Bond Auction Fails to Match Spain Success

By Valentina Za

Jan 25 (Reuters) — Italy’s three-year debt costs fell below 5 percent but its first bond sale of the year failed to match the success of a Spanish auction the previous day, reflecting the heavy refinancing load Rome faces over the next three months.

Italy raised the maximum planned amount of 4.75 billion euros at the auction but did not live up to market expectations raised by a Spanish tender on Thursday where Madrid raised 10 billion euros, twice the planned amount, at lower rates.

Both Italy and Spain are benefiting from half a trillion euros of cheap three-year funds the European Central Bank injected into the banking system in an unprecedented move last month. Investors, however, remain more cautious towards Rome in the light of its much larger refinancing needs.

“The auction metrics look robust on aggregate, although not as spectacular as yesterday’s Spanish supply,” said Michael Leister, a strategist at DZ Bank in Frankfurt.

Italian bonds rallied after domestic banks awash with ECB money snapped up Spain’s bonds on Thursday. The mixed results of the Italian sale tempered market enthusiasm and Italy’s 10-year yields rose back above 6.60 percent in the secondary market, after falling below 6.50 earlier in the session, to their lowest level in more than a month.

“This will serve to dampen some of the markets’ enthusiasm in the wake of yesterday’s Spanish auction … It doesn’t defeat the notion that the ECB extraordinary liquidity provisioning will support peripheral debt but it perhaps tempers expectations as to what degree these operations will support,” said Richard McGuire, a strategist at Rabobank in London.

LOWEST SINCE SEPTEMBER

Italy sold its November 2014 three-year benchmark bond at an average rate of 4.83 percent on Friday, down sharply from a yield of 5.62 yield at an auction just two weeks ago.

In a sign of improving funding conditions, this was the lowest yield at a three-year auction since September last year though fellow debt struggler Spain only had to pay 3.384 percent on three-year bonds on Thursday.

The bid-to-cover ratio fell to around 1.22, versus an already weak 1.36 ratio at the end-December sale, showing anemic demand for the paper. This time, however, Italy sold the top planned amount of its three-year benchmark.

Rome also sold debt due in July 2014 and August 2018.

The ECB’s liquidity boost, evident also at an Italian bill sale on Thursday where one-year yields more than halved, leaves Italy’s Treasury better placed to refinance some 90 billion euros of bonds maturing between February and April.

That is more than Spain aims to issue in medium and long-term maturities in the whole of 2012.

What analysts now describe as a challenging task may have been an impossible one at the end of November, when market fears of a financial collapse pushed Italy’s short-term debt costs towards 8 percent.

Under the leadership of a new technocrat government, Italy has embarked on a bold austerity push aimed at balancing the budget in 2013.

Analysts at Barclays Capital noted in a report that third-quarter budget data showed a decline in current expenditures for the first time ever, when excluding debt servicing costs.

But Prime Minister Mario Monti must now convince markets it can revive Italy’s ailing growth rate by overcoming entrenched resistance to its liberalization program.

Analysts warn that sentiment on the markets remains fragile with worries over a deal with private investors to voluntarily write down half of the value of their Greek debt lingering in the background.

“Looking beyond this one auction, the issuance challenge for Italy remains significant. Market pressures are most apparent in the 10-year sector of the curve which will face supply in two weeks time,” Citi analysts wrote in a research note.

Italy will sell five- and ten-year bonds at the end of January. On this longer maturities demand from foreign investors plays a bigger role but analysts say Italy would be able to shift only part of its funding burden to the short-term ahead of a second three-year liquidity tender at the end of February.

IMPORTANT SIDEBAR ABOUT CENTRAL BANKING

Email from JJ Lando, now at Nomura:

“THE LTRO DIDN’T DO ANYTHING. ALL THE MONEY WOUND UP AS DEPOSITS AT THE ECB” “QE DIDN’T DO ANYTHING. ALL THE MONEY BECAME EXCESS RESERVES BACK AT THE FED.”
(Apologies in advance to all who have heard me give this one ten times before)

1. Central Banks, whenever they buy any asset (eg lend eg grow balance sheet) create new reserves.

2. Commercial banks and people do NOT have the capacity to destroy those reserves. Once the Fed or ECB wires the money or creates that asset line item on its spreadsheet, there is an equal and offsetting liability on its spreadsheet called reserves. This spreadsheet cannot be broken.

3. All that commercial banks can do is lending, which moves some of those reserves from ‘excess’ to ‘required’ but they are still there.

4. Commercial Banks make this lending decision based upon regulatory capital and profit motives, not based upon reserves. They have a ‘captive audience’ in their Central Banks, who MUST create the necessary reserves (a floored amount) to prevent interest rates from going to infinity.

5. When a Central Bank does a lot of Balance Sheet expansion in a short time, it’s going to wind up as deposits/excess NO MATTER WHAT. If the Fed does 1T of QE, Banks don’t suddenly ‘find’ the regulatory capital to make 10T of loans. And even if they did, there would be the SAME AMOUNT OF TOTAL RESERVES.

6. Bank lending to a 0% risk weighted sovereign actually does NOTHING to diminish excess reserves.

7. Simplified Illustration: ECB does a very large unsterilized LTRO. They take a lot of sov paper on balance sheet (temporarily), and they wire NEW FUNDS to thie member banks. Those member banks take some of the money and buy paper from the ITalian government. That government spends the money by wiring it to its pensioners. Those pensioners take it to buy food from the local grocer. The local grocer DEPOSITS IT IN HIS BANK. SOMEWHERE DOWN THE CHAIN the money winds up on deposit in some member bank, be the chain long or short. WHATEVER MONEY THE ECB CREATES WINDS UP ON DEPOSIT IN ITS MEMBER BANKS, WHETHER OR NOT IT IS ‘USED’ TO BUY SOVEREIGN DEBT, ‘USED’ TO MAKE LOANS, OR NOT USED AT ALL.

8. Please. I never wish to read again that ‘Central Bank money went unused because it wound up as deposits.’ IT HAS NO WHERE ELSE TO GO. THE BANKING SYSTEM IS A CLOSED LOOP. With the possible exception of someone making a withdrawal, taking the paper, and making a bonfire (actually not feasible in the hundreds of billions anyway bec there are constraints)

9. And that is probably how Italy just managed to borrow at 1.64%
Good luck!

Central Banks ‘Printing Money Like Gangbusters’: Gross

Can’t argue with success:

Central Banks ‘Printing Money Like Gangbusters’: Gross

By Margo D. Beller

Jan 11 (CNBC) — The world’s central banks are “printing money like gangbusters,” which could revive the threat of inflation , Pimco founder Bill Gross told CNBC Wednesday.

By putting “hundreds of billions” in currency in circulation, the central banks “can produce reflation—that’s why we’re seeing the pop in oil, gold” and other commodities, he said in a live interview.

At the same time, “there’s the potential for deflation if the private credit markets can’t produce some sort of confidence and solvency going forward,” Gross said. “So we’re at great risk here, not only in the U.S. but on a global basis.”

Gross has previously predicted a “paranormal” market in 2012 characterized by “credit and zero-bound interest rate risk” and fewer incentives for lenders to extend credit.

He said stock and bond investors must lower their expectations when it comes to returns, with 2 percent to 5 percent as good as they get this year.

He also told CNBC he expects the Federal Reserve will keep interest rates “exactly where it is at 25 basis points for the next three to four years.”

Gross’s Total Return Fund, the world’s largest bond fund, had over $10 billion in outflows in 2011, but Gross stressed the fund “started 2011 at $240 billion and ended it at $244 billion.”

He said he will run the Pimco Total Return Fund ETF , which starts March 1, the same way he runs the bond Total Return Fund, adding, “They’re twins.”

Riley Says Greek IMF Growth Program Doesn’t Seem to Be Working

Astute observation:

Riley Says Greek IMF Growth Program Doesn’t Seem to Be Working

Jan. 10 (Bloomberg) — David Riley, head of sovereign ratings at Fitch Ratings, said the International Monetary Fund’s program for Greece may not be working.

“The IMF program at the moment doesn’t seem to be working,” he said at a conference in London today. “The economy is contracting” while the point of the program was to promote growth.

Proposal update, including the JG

My proposals remain:

1. A full FICA suspension:

The suspension of FICA paid by employees restores spending which supports output and employment.
The suspension of FICA paid by business helps keep costs down which in a competitive environment lowers prices for consumers.

2. $150 billion one time distribution by the federal govt to the states on a per capita basis to get them over the hump.

3. An $8/hr federally funded transition job for anyone willing and able to work to assist in the transition from unemployment to private sector employment.

Call me an inflation hawk if you want. But when the fiscal drag is removed with the FICA suspension and funds for the states I see risk of what will be seen as ‘unwelcome inflation’ causing Congress to put on the brakes long before unemployment gets below 5% without the $8/hr transition job in place, even with the help of the FICA suspension in lowering costs for business.

It’s my take that in an expansion the ’employed labor buffer stock’ created by the $8/hr job offer will prove a superior price anchor to the current practice of using the current unemployment based buffer stock as our price anchor.

The federal government caused this mess for allowing changing credit conditions to cause its resulting over taxation to unemploy a lot more people than the government wanted to employ. So now the corrective policy is to suspend the FICA taxes, give the states the one time assistance they need to get over the hump the federal government policy created, and provide the transition job to help get those people that federal policy is causing to be unemployed back into private sector employment in a more orderly, more ‘non inflationary’ manner.

I’ve noticed the criticism the $8/hr proposal- aka the ‘Job Guarantee’- has been getting in the blogosphere, and it continues to be the case that none of it seems logically consistent to me, as seen from an MMT perspective. It seems the critics haven’t fully grasped the ramifications of the recognition of the currency as a (simple) public monopoly as outlined in Full Employment AND Price Stability and the other mandatory readings.

So yes, we can simply restore aggregate demand with the FICA suspension and funds for the states, but if I were running things I’d include the $8 transition job to improve the odds of both higher levels of real output and lower ‘inflation pressures’.

Also, this is not to say that I don’t support the funding of public infrastructure (broadly defined) for public purpose. In fact, I see that as THE reason for government in the first place, and it should be determined and fully funded as needed. I call that the ‘right size’ government, and, in general, it’s not the place for cyclical adjustments.

4. An energy policy to help keep energy consumption down as we expand GDP, particularly with regard to crude oil products.

Here my presumption is there’s more to life than burning our way to prosperity, with ‘whoever burns the most fuel wins.’

Perhaps more important than what happens if these proposals are followed is what happens if they are not, which is more likely going to be the case.

First, given current credit conditions, world demand, and the 0 rate policy and QE, it looks to me like the current federal deficit isn’t going to be large enough to allow anything better than muddling through we’ve seen over the last few years.

Second, potential volatility is as high as it’s ever been. Europe could muddle through with the ECB doing what it takes at the last minute to prevent a collapse, or doing what it takes proactively, or it could miss a beat and let it all unravel. Oil prices could double near term if Iran cuts production faster than the Saudis can replace it, or prices could collapse in time as production comes online from Iraq, the US, and other places forcing the Saudis to cut to levels where they can’t cut any more, and lose control of prices on the downside.

In other words, the risk of disruption and the range of outcomes remains elevated.

the Fed and the dollar

Imagine being on the FOMC and in the mainstream paradigm

In 2008 you moved quickly to make sure the US would not become the next Japan

You cut rates to 0, even faster than Japan did.

You provided unlimited liquidity to the dollar money markets,
both home and abroad.

You did trillions of QE, sooner than Japan did.

You announced you expected rates to stay down for two years.

etc. etc. etc.

And what do you have to show for it, 3 years later?

GDP marginally positive, much like Japan
Inflation working its way lower to Japan-like levels, especially housing and wages.
Employment stagnant a la Japan.

And now, after 3 years of 0 rates, and trillions of QE, the dollar is going up, much like the yen did.
After the Fed has done all it could think of to reinflate, and then some.

And all just like MMT suspected.
And for what should be obvious reasons.

politics shifting towards JG?

U.K. to Propose Work-for-Benefits Program, Sunday Times Reports

By Svenja O’Donnell

Jan 8 (Bloomberg) — The U.K. coalition government is planning a compulsory community work program for the long-term unemployed, the Sunday Times said, citing Employment Minister Chris Grayling.

The plan will include stopping benefits for as many as three years for those who refuse to sign up, the newspaper said.

Grayling has indicated his support for the plan, saying a “work for dole” program will help curb the U.K.’s expenditure on benefits for the jobless, the paper said.

People who have been unemployed for three years or more will be forced to work unpaid for six months under the terms of the program, the Sunday Times said.