Not since the Lehman default has there been such dislocation in the secondary markets for bonds.
Last week, turnover in the GGB market ground to a halt and the recent price falls reflect an absence of liquidity. Total reported transactions on Thursday, for instance, were only EUR 6M versus something like EUR 300M on a normal trading day.
The apparent withdrawal of market-makers and buyers from the secondary market has created some stunning disparities and opportunities. The GGB 03/12 with 36 weeks to maturity has a quoted yield of 51.8% and a five point bid-ask spread. This is clearly excessive given that Greece sold 26 week TBill paper on Tuesday at 5.65% in the primary market. The Government raised EUR 1.6B and they have another auction for 13 week paper on Tuesday. The secondary market has basically stopped operating while the primary market is functioning well.
Why doesn’t the Government keep issuing at 5.65% in the primary market and purchase their short-term GGB’s at steep discount in the secondary market – what an arbitrage opportunity!
What is going to happen? My expectation is that once the Europeans agree the bailout structure, supposedly next Thursday, the Greek Finance Ministry will be permitted to buy-back their bonds in the secondary market and this will very quickly arbitrage the gap between the primary and secondary markets for short term paper. Accordingly, the secondary market looks very very cheap and I am boldly intending to add to my personal holdings.