EFSF Issues 91-Day Bills

Posted by on Dec 13, 2011 in Uncategorized | No Comments

The market popped after the EFSF announced completion of a sale of just under 2 billion euro of 91-day bills.  The good news I guess is that it came at the ultra low yield of 0.22%.

Why are they doing 91-day bills for EFSF?  The point of EFSF is to address the liquidity part of the European sovereign debt problem.  The EFSF does absolutely nothing to address solvency issues, but it can help with liquidity and rolling over existing debt.  But what is the point of 91-day EFSF paper?

The “bazooka” version of EFSF was meant to be long dated with leverage.  Leverage doesn’t seem to work, but what happened to long dated?  The EFSF should be borrowing long-term in order to provide financing for weak countries.  This is merely adding to the roll risk problem.  Now with whatever sovereign debt that needs to be rolled, Europe will have to roll EFSF paper.

If downgrades are coming (and it seems like Fitch, Moody’s, and S&P are moving in that direction), why would you not try to lock in more money at longer terms now?

The market can rally on this news, but it is a blatant attempt to try to make something sound positive, when the reality it is yet another bad decision, in a long line of bad decisions, relating to EFSF.  If they had raised 10 billion of 5-year money at 2.2% (France’s yield) I would be more excited that they are doing the right thing longer term.  This is just for show and in the end is going to add to the liquidity problem, rather than addressing it.

The ECB “unlimited” 3-year money seems to be having some effect.  Curves are steepening, but in a weird way.  Italian 2-year yields are 26 bps better, the 5-year is unchanged, and the 10-year is 10 bps HIGHER.  I would not have guess that with the 2-year 26 bps better, the 10-year would actually be worse.  That is a strange move and is likely distorted by the “unlimited” 3-year money.

Spain also came with short paper (1 year and 18 month).  More respectable than the 91 days but again, sticking to that the 3 year and in theme.

Europe, and the EFSF in particular, should be locking in longer term financing, not going for the easy short-term roll.  It is not a solution to their solvency problems, and is not helping the liquidity problems.

Maybe we rally more as investors get excited about a possible Fed Holiday Season present, but don’t view the EFSF auction as much of anything (other than a sign that they really don’t know what they are doing).