Wild day in the markets today as Ben Bernanke’s cloture vote passed and his reconfirmation vote soon after, thanks to a Zimbabwean Senate today.
But the real story today was Greece’s ever-widening CDS spreads, with the 5yr spread to senior crossing 400bps territory into all-time wides, as default and bailout seem to be the only remaining possibilities at this point. The euro continued its selloff and broke below 1.4000, while Greece’s bond spreads to bunds also widened significantly. With talks of a possible IMF bailout, however, the long bund/short Greek bond trade may unwind as risk spreads across the eurozone.
In other news, money market fund redemptions are now permitted to be suspended by the SEC. Money market funds are (supposed to be) highly liquid and redeemable cash equivalents with low yields, with asset books filled with commercial paper and other very liquid short-term debt instruments. After last year’s Lehman debacle, which caused two funds to break the buck, a complete halt in operational financing, and allegedly the brink of systemic financial collapse, the SEC is now subjecting these funds to potential withdrawal suspensions in the event of another electronic bank run.
What this does is shift demand from short-term corporate debt to short-term sovereign debt, which the Treasury needs, given its huge funding holes. In addition, the capital outflows from front-end corps gets mopped up by taxpayer-funded guarantees.
The sudden loss of liquidity for these securities may be a prime culprit for the negative yields observed in 1-mo T-bills yesterday. That and risk aversion as risk assets begin the reversal of their junk rally since March 2009.