MBS MID-DAY: 2/8/2012


News that the ECB would turn over it’s Greek bond holdings to the EFSF in exchange for EFSF bonds of higher amounts, provides another potential reason that yesterday’s planned meeting among Greek leaders to approve the terms of the bailout was postponed.

This ECB/EFSF news is important, but not game-changing. It’s basically a crafty way for the ECB to get around their previous misgivings about more direct involvement. They’re “working the system,” as it were, essentially giving Greece the break it was looking for without a haircut to their own holdings (because a haircut would have amounted to the ‘direct injection’ that they’re so opposed to) and the EFSF pays the difference. It doesn’t seem like markets have considered that this further taps the EFSF’s resources, meaning they’ll either need more money, more leverage, or simply have less to lend to Portugal in a few weeks when that shoe drops.

Perhaps the default weakness overnight had more to do with the fact that the ECB/EFSF deal is a tacit confirmation that the Greek bailout deal is probably mostly resolved. The ECB probably would not have gotten in bed with the EFSF on this if that were not the case because it would embolden the private sector investors to demand a better deal (“Oh! if the ECB is involved now, I want less of a haircut!”).

News that German parliament would vote on all this next week as well as other facets of Greece’s balout has done much to temper the overnight bearishness in bond markets, actually bringing MBS back into the green, currently up a tick at 103-25. 10yr TSYs haven’t quite broken even yet, but are only 1bp higher on the day at 1.9875. With the auction coming up later today, we wouldn’t be surprised to see 10’s continue to be a bit weaker than MBS, and perhaps slightly weaker in general by way of building a bigger concession.

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