Et tu, Germany?

[Umfriend]

The FED had made the decision to reduce the rate on USD swaps last Monday. The rate on sovereign bonds of multiple euro countries has been decreasing since.

AFAIK, that decision was made public on Wednesday and becomes effect December 5th. Moreover, this facility is intended to provide USD, NOT EUR. I do not see how this action would lower the yield on EUR-issuing sovereigns but I am very interested to hear how you think that works.

[dZeus]

AFAIK, that decision was made public on Wednesday and becomes effect December 5th. Moreover, this facility is intended to provide USD, NOT EUR. I do not see how this action would lower the yield on EUR-issuing sovereigns but I am very interested to hear how you think that works.

About 'making a decision public'. In the recent past there have been plenty of people that are not part of 'the public' yet that can trade on the knowledge they get. Mostly because in the US there is no strict separation between the FED, financial policy committees, financial regulators and 'big finance'.

As for declining rates in EUR denominated sovereigns resulting from USD liquidity provided via currency swaps between the FED and e.g. the ECB:
- it alleviate USD funding needs of European banks (who pledge EUR denominated assets at the ECB which provides them with USD in return)
- less funding stress for European banks can be perceived as reduced risk of European government intervention in case these banks would no longer be able to meet their USD funding needs. i.e. reduced risk for sovereigns that have a big banking sector with banks that are short on USD.

Of course, providing USD through this swap mechanism only alleviate liquidity issues. If, however, banks suffer from solvency issues (and no further steps are taken to resolve these) then the positive reaction by the stock and bond market will be 'transitory'.

[Umfriend]

I'll disregard the notion that insider trading has any role here until at least some substantiation is provided. The rally in the stock markets after the announcement (following depressed markets after a three day rally) rather countradicts the notion anyway.

In any case, the increased supply of USD causes a decreased supply in EUR which should drive EUR rates up, not down.

Moreover, the assertion that all EU-sovereign rates declined is wrong. Italian en Spanish sovereign debt became cheaper and perhaps some others too.

I think the easiest explanation applies here: inxreased confidence in Belgium credit due to the political developments, I.e. The near certain forming of a government.

[dZeus]

Substantiation in this particular case or for my allegations in general? I can provide links that do the latter.

How does the USD swap decrease the liquidity of EURs? As far as I understand these swaps are done between EUR and USD reserves of the ECB and FED respectively. Banks can pledge any crap that the ECB accepts as collateral. Whatever they pledged, private US banks weren't interested in these collaterals or they would have provided for USD funding themselves to EUR banks.

[Umfriend]

I'd be interested in both but would appreciate it if, you know, the silly stuff is excluded. For the OT-topic we're discussing now I'd need some directed at this specific case AND I would need to be explained how an increase in USD supply lowers interest for Belgium but not for Spain and Italy for instance.

As you say, EU banks will have to pledge collateral. They might have done so to get EUR funding. As they pledge it for USD funding, the liquidity supply in EUR is diminished (you can't pledge twice).

[Umfriend]

Hmmm, Monti announces measures that apparantly give some comfort to investors and the 10Y yield drops by 0.6%. I wonder what shady practices are the alternative explanation for the drop in yield this time.