Those of you who read yesterday’s post are probably wondering ‘what happened?’ For those who missed the post, I had conjectured that, as part of the ECB’s QE policy, the regional Central Banks in Europe would enter the market in the early hours of Monday’s trading, vigorously bid up the price of their longer maturity bonds, and then come off the bid an hour or two later.
The following Bloomberg grab shows Monday’s market action in the Spanish and Portuguese 30 year bond markets. Spain is the white line and Portugal is in yellow.
The result: Vindication!
While we had expected the Bank of Spain and Bank of Portugal to appear closer to 8AM Europe time (15:00 in the diagram), they both eventually turned up at 9.30AM (16:30 in the diagram), and almost in concert pushed their 30yr bond prices up 2% over a period of 45 minutes.
Three questions come to mind:
1. Why did the Central Banks wait until 9.30AM when they could have really shoved the market at 8AM? My guess is that the Regional Central Banks’ trading desks schedule a regular conference call for 8AM to plan their day’s activity. The Greek election result would have thrown a spanner in the works, and what should have been a 15 minute discussion bled over into an hour as they assessed the market response. This is only speculation, of course.
2. Who is selling the long end of the Spanish and Portuguese bond markets? With the ECB’s cheque book open these markets are going up, up and away. Bondholders need a pretty good reason to stand in the way of Superman. It just doesn’t make any sense to sell.
3. Why doesn’t the market just accept that 30yr yields in these markets are heading for 1% and start pricing for that now? This is the trillion Euro question and sure beats me.