Bond Markt Regulatrs Shld Ban Shorting Euro Soverign Bonds!

Discussion in 'General Global Topics' started by JimofPennsylvan, Nov 23, 2011.

  1. JimofPennsylvan

    JimofPennsylvan VIP Member

    Jun 6, 2007
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    To the world's shock Germany couldn't sell an entire lot of $6 billion euro bonds today. People throughout the world have not heard any reliable solution to the Euro sovereign debt problem from public officials, if you follow this writer you know this writer believes the only practical solution is for distressed countries to force their own people to buy their bonds and to a minor degree the ECB to print money and buy these distressed countries bonds coupled with these distressed countries changing their fiscal policy to cut spending and increase revenues. Nevertheless, regardless of the major economic changes that need to take place to fix this problem, a great improvement a critical help can be provided to improve this problem to rein in the terribly high interest rates some of these European Union countries are having to pay on the bonds they sell these days by regulators of world markets especially the European Union and the U.S. markets "banning the short selling of sovereign debt bonds" for European Union countries. Short selling refers to an investor borrowing a security and selling the borrowed security with the hope that the security will fall in value by the time the security has to be returned so the short seller can buy a replacement security at a cheaper price than he or she originally sold the security for and pocket the difference as a profit; short selling is a bet a security will lose value over time.

    Short selling of these distressed European Union countries bonds has to be creating downward pressure on the price of these bonds it has to be undermining stable pricing and thus stable yields on these bonds. When investors of these bonds see that investors are shorting these bonds to a high degree it has to shake their confidence in these bonds which has to be causing these investors to not buy these bonds or demand a higher interest rate for these purchases. European Union regulators very prudently ban the short selling of stocks of European financial institutions such as banks which shields these banks stocks from many batterings that would drive down their stock prices worse than they currently are. Banning short selling of sovereign debt bonds makes even more sense than banning it for bank stocks because stock pricing is more objective based than bond pricing stock pricing is generally arrived at by taking a multiple of earnings, the multiple fluctuates based on the state of the economy or the industry but it is a pretty settled pricing system generally bond pricing on the other hand is a much more subjective and opaque system it is a matter of gaging a soverigns' ability to repay its outstanding bond obligations and determining how many bonds a sovereign has to sell in an upcoming time period and gauging sovereign debt investors interest in buying such amount of bonds. Sovereign bond investors have to be concerned about how much can I sell a sovereign debt bond for if I don't hold it until maturity and that is largely just guesswork, largely just making a subjective opinion call and when one sees the influence of shorting bonds on this situation it just makes the whole situation worse when large scale shorting a sovereign's bonds takes place such shorting makes buying investors of such sovereign's bonds loose confidence and makes them skittish about buying or makes them demanding higher yields. It really is a no brainer that banning short selling of European Union sovereign debt bonds would help this sovereign debt problem for the world, it wouldn't be a solution because these sovereigns are leveraged too high but it would help in the investor confidence part of the problem!
  2. Toro

    Toro Diamond Member

    Sep 29, 2005
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    Surfing the Oceans of Liquidity
    This is a very bad idea.

    Shorting isn't causing the problem. Not buying is the problem. Investors are pulling away from Europe because there are liquidity and solvency issues, and the ECB isn't monetizing the debt and is refusing to do so.

    Banning the short sales of financial stocks hasn't helped either. Banks have continued to do worse since the ban went into effect, and there is no evidence that the ban has been effective.

    Short sellers are a convenient scapegoat but their demonization is rarely accurate. The amount that is shorted is miniscule to the amount of plain vanilla selling that occurs. Naked shorts are especially uneconomic in the bond market because there is negative carry - i.e. an investor must pay the interest on the security borrowed. My guess is that if shorting on government bonds was instituted, it would trigger a massive sell-off in financial markets because it would be seen as a very desperate move and would remove the most commonly used hedge, meaning investors would unwind what they own because they couldn't hedge their positions. What would happen is that corporate and mortgage interest rates would spike higher as investors would sell corporate and mortgage bonds, and stock markets would plummet.
    Last edited: Nov 23, 2011
  3. ekrem

    ekrem VIP Member

    Aug 9, 2005
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    Look at the interest the bonds were offered.
    It was 10-year bonds which didn't even match the inflation.

    Germany also brought 3-month bonds to the market this month.
    0.08% interest.
    Krisenprofiteur: Deutschland*kann sich fast umsonst verschulden - SPIEGEL ONLINE - Nachrichten - Wirtschaft

    Why should investors continue to buy such kind of bonds when they can buy other European bonds with much higher interest for which Germany indirectly stands as security.

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