Blatant Manipulation Of Spanish, Italian And German Bonds

Includes: EWG, EWI, EWP, FXE
by: TheSlog

Now here's a funny thing. (All timings are GMT April 11, 2012.)

At 9:27 AM Spanish industrial production figures for February released, showing the appalling state of its economy, falling a monthly 3% vs. -2.5% in January.

At 9:48 AM in an €11B auction of Italian 12- and 3-month debt, bond yields leap upwards. The 1-year doubles to 2.84% from 1.405% in a previous sale in March, and 3-month paper zooms to 1.25% from 0.49%.

It's looking pretty bloody out there. But there will be no help forthcoming from Mario Draghi's ECB (right?) because the bond-buying program is at an end.

10:03 AM Yields on 10-year Italian and Spanish bonds suddenly plummet, by 18 basis points and 14 basis points, respectively.

Apart from 15 minutes, nothing has happened, nothing has changed. No ClubMed miracle discovery of gold-plated uranium has come to light. And yet, in that same 15 minutes - when, equally, no news of a nuclear attack on Berlin has broken - German yields, which had been dropping, suddenly zap up 15 points. (Which, on a total level of 1.79%, is some going).

Now you know why Merkel and Schauble were so bitterly angry when they realized how the politically adept Mario Draghi had turned their central bank into his ECB. You buy a little here, you sell a little there, and hey, presto, eurozone bond spreads fall. On to the next stage.

12:00 noon, Germany sees very weak demand at an auction of 10-year Bunds, undersold by €1.13 bn. The debt needed a yield of 1.77% to achieve even that - much higher than the 1.64% DeutscheBunds were yielding Tuesday.

The sequel: Paul Donovan, deputy head of global economics at UBS AG, talked to Bloomberg soon afterwards about the prospect of further European Central Bank intervention in the Spanish bond market.

This is just a little bit of empirical observation to back up the more sweeping global observations I made in Wednesday's earlier post. The moral of the story is, as I keep saying over and over again, the minute you are deep in debt (whoever you are) the banks have the upper hand.

For the ordinary investor, there is a clear moral here: Stay out of any sector where there is evidence of manipulation. Stay close to individual stocks, get to know the company, and do your homework. Sooner or later, businesses will come good again. If you've chosen wisely, so will you.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.