MBS RECAP: 2/16/2012


There has been a lot of “noise” this week concerning various aspects of the Greek bailout, including a motley influx of headlines about an hour ago. The only market mover of the group is the news that the ECB is airlifting itself off the sinking ship, so to speak. Over the weekend, the ECB will swap out their Greek debt in exchange for similarly-termed debt minus the imminent guaranteed loss and implicit involvement in a private sector bond swap expected to follow Monday’s approval of the bailout.

Since the ECB bought these bonds at a discount, they’ll have some cash left-over as the bonds are being swapped out at face value. That cash goes back to the various Euro zone states from whence it came. Although the party line is that EU states can do whatever they want with the cash, the tacit instruction from the ECB is “Hey you guys… Here’s some cash for you to give to Greece.” While simply “giving cash to Greece” may be a gross oversimplification, it’s not an inaccurate one.

The idea is that this will not only get the ECB out of dodge ahead of Private sector negotiations, but will also help lessen the haircut requirements that seem to have risen almost uncontrollably (from 50, to 60, and now 70 per cent).

That’s what’s behind bond-market weakness in a nutshell, not the flowery talk of expected approvals of bailout packages. No one really cares what Euro zone officials THINK will happen with the bailout vote. This ECB swap news is something substantive that markets can sink their teeth into. So far those teeth have taken a bite out of MBS prices, along with Treasuries, but those losses seem to have found some support as markets realize that the news is more about “housekeeping” ahead of next week’s events than it is some epic shift in the handling of Greece’s bailout.

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