TIB Ticker - A Good Day for the Holdouts

May 16, 2012Daily Rates & Viewpoints From the Officers & Staff of TIB.

A Good Day for the Holdouts

When Greece concluded the restructuring of its debt last month, where just less than 200 billion in Euro denominated bonds were swapped for new debt that caused those bondholders to take up to a 74% hit on their investment, there was a small holdout of investors that did not participate. Those bondholders, who are mostly speculators that bought bonds recently hoping Greece won’t default or are hedging their credit default swap positions, were anxiously awaiting yesterday as the first batch of floating rate notes that were sold ten years ago came due.

Yesterday’s maturity affected holders of 435 million Euros’ worth of bonds, but it is important to note that there are 7 billion such bonds outstanding owned by investors that declined to take part in the restructuring. The decision for the Greek government was not going to be an easy one. On the one hand, if you pay the principal due to the holdouts, any investor that participated in the restructuring hoping to put Greece on the path towards an economic recovery would undoubtedly feel taken advantage of, not to mention the citizens of the country that feel the money used to repay debt holders would be much better spent elsewhere. On the other hand, not repaying the debt would finally be considered a default for a country that has tried to avoid that if at all possible, and would trigger payments on credit default swap contracts written on the embattled country.

Although it appeared that Greece may have had up to a 30 day grace period to determine if they would make payment based on verbiage within the bond’s prospectus, the government took that out of the equation by issuing a statement stating “The Hellenic Republic today announced that it would make a timely payment of the principal, as well as the interest due on approximately EUR 435 million bonds maturing on May 15”. They stated that the decision was made carefully, but it seemed very likely to be the outcome, considering the legal nightmare for the country going forward if it did default.

The bondholders of yesterday’s maturity can be assured that they will receive payment, but another important point was added to the statement. The holders of the remaining 6.6 billion Euros of bonds that weren’t restructured will have to wait and see as the statement added that the repayment of this maturity will not set a precedent for the repayment of future maturities. I’m sure that was added to give the government options, but after repaying this portion, it would be hard to imagine they will determine it to be a good idea not to repay future holdouts.

Added to the mix in Greece, is an interim government trying to make decisions as they call for new elections, and fears of a run on banks, as almost a billion in deposits were withdrawn earlier this week. There has been news of the European Central Bank discussing potential recapitalization of the Greek banks to calm citizens. As you can tell, things are still very much on shaky ground, even after the restructuring deal last month that calmed markets briefly.

What does this all mean for U.S. bond markets? Not much in the short term. As bad as things have been in that part of the world, yesterday’s announcement didn’t move markets much at all. The 10-year Treasury is still hanging around the 1.80% range, while the long bond has been under 3.0% for several days now. With all the European concerns, along with economic concerns in this country, rates should remain at these long term resistance levels for some time.

Please call your TIB Capital Markets Investment Officer if there is anything we can help with. We look forward to visiting with you!

Reed Bateman Reed Bateman
Vice President-TIB Capital Markets
rbateman@mybankersbank.com

Market Levels @ 8:10 AM CDT

TIB Fed Funds & MMDA Rates - Previous Day
Agent	0.20%	Prin	0.05%	MMDA	0.30%
Agent	0.20%	STAR Prin	0.10%	STAR MMDA	0.35%

Key Indices/Commodities
1 - Month LIBOR	0.23%	Dow Jones	12632.00
3 - Month LIBOR	0.46%	NASDAQ 100	2893.76
1-Yr LIBOR	1.06%	S&P 500	1333.80
1-Yr CMT	0.19%	Spot Gold	1539.60
Prime	3.25%	Spot Silver	27.50
3-yr LIBOR Swap/Offer	0.75%	Spot Crude Oil	92.65
5-yr LIBOR Swap/Offer	1.13%	CRB Index	287.90
3 Mo - Fed Fund Futures	0.16%	6 Mo - Fed Fund Futures	0.17%

US Treasury Yields		US Non-Callable Agency Yields
Yield	Maturity	Yield	Spread
0.00%	90 - Days
0.04%	180 - Days
0.23%	2 - Year	0.27%	4bp
0.35%	3 - Year	0.52%	17bp
0.72%	5 - Year	1.03%	31bp
1.77%	10 - Year	2.20%	43bp
2.92%	30 - Year
154 BPs		Yield Curve(2's-10's)

Sample 1x Callable Agency Issues
Description	Call Date	YTC	YTM
FHLMC 2.00 12/11/20	6/14	2.00%	2.00%

Select MBS Levels
Description	Coupon	Yield	Spread/Duration*
15-Yr FNMA	3.50%	1.9%	132 / 3.69
30-Yr GNMA	3.50%	2.81%	91 / 9.00
*Duration @ 12 month Historical CPR

Morning Commentary:	David Terrell
European Central Bank president Mario Draghi said they will not compromise on key principles to prevent Greece from exiting the union. This is a new stance for the ECB, and it looks more and more likely Greece will exit the union. I would expect a flight to quality and treasury prices to rise if Greece exits. If they exit, this leaves the door wide open for Spain and Italy to leave if their bond market becomes unstable enough to warrant such a move. The rally in treasuries has pushed the spread on 2’s-10’s down to 149bps, which is the lowest since January 2009. Housing starts and industrial production picked up in April, which has overshadowed the news from Europe, causing bond prices to fall this morning.

Morning Commentary:

David Terrell

European Central Bank president Mario Draghi said they will not compromise on key principles to prevent Greece from exiting the union. This is a new stance for the ECB, and it looks more and more likely Greece will exit the union. I would expect a flight to quality and treasury prices to rise if Greece exits. If they exit, this leaves the door wide open for Spain and Italy to leave if their bond market becomes unstable enough to warrant such a move. The rally in treasuries has pushed the spread on 2’s-10’s down to 149bps, which is the lowest since January 2009. Housing starts and industrial production picked up in April, which has overshadowed the news from Europe, causing bond prices to fall this morning.

Information contained herein is based on sources we believe to be reliable but its accuracy is not guaranteed. Customers should rely on their own outside counsel or accounting firm for specific circumstances. The securities, yields or levels discussed herein are for illustration purposes and are not guaranteed, not obligations of any bank, thrift or other entity and are not insured by the FDIC.

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