Friday, June 5, 2015

5/6/15: The Fiat of OMT: (almost) three years on...

Remember all the bull about the 'unique' efforts, the 'best in class', the 'prudent policies' that got our bond yields down so dramatically in the past? Well, the view here was and remains that most of the 'normalisation' in bond yields was down not to our internal policies or choices, but to ECB and that our yields declined, largely, in tandem with the Euro area yields (that tandem bit is best explained as the decline in financial fragmentation - the financial gap between the 'periphery' and the 'core'). Here's a handy chart from the BBVA Research plotting the evolution of the latter with some timelines added:

What's even more 'funny' in the above is that what 'worked' for the Euro area was not tangible measures such as LTROs, TLTROs, QE, ELAs etc, but the never-to-be-fulfilled promise of an ultimate backstop - the OMT, which never once was actually used or deployed as a tangible instrument and remains, through today, just that - verbal promise/threat unbacked by anything but the fiat of the markets conviction that no matter how much one needs to, swimming up the powerful waterfall is a bad idea.

The original 'Whatever it takes' moment:

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