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Two-Thirds Of Citi Survey Participants Say Central Banks Are Now Fully In Control

With nearly $2 trillion in 5-year-and-in eurozone govies sporting sub-zero nominal yields and with ~16% of global government debt sitting in NIRP territory, it’s abundantly clear that the idea of the “market” (a word which at this juncture has virtually no meaning) functioning as a price discovery mechanism is now absurd. Even when reality came calling in mid-January courtesy of the SNB’s abrupt abandonment of the euro peg (which of course amounted to a tacit admission that central banks aren’t omnipotent after all), the ECB took us right back into the monetary policy twilight zone barely a week later (apparently “whatever it takes” turned out to be around 1.2 trillion euros worth of asset purchases), and in the process ensured that investors’ inevitable front-running of Q€ would serve to blunt any upward pressure on sovereign and corporate spreads occasioned by the drama set to unfold in Greece.

It comes as no surprise then, that even in the face of hopelessly contentious negotiations between Greece and its creditors, yields on Spanish and Italian 10s are hanging out near multi-year lows (although up around 20 bps since the Draghi’s presser) and euro IG yields are at record tights. This despite the fact that Spain appears to have, in the words of Syriza parliamentary spokesman Nikos Filis, caught the “Syriza virus,” Italy is being thrown under the bus by a Yanis Varoufakis intent on proving Greece isn’t the only insolvent country in the currency bloc, and European stocks have diverged dramatically from corporate earnings estimates.  

But at the end of the day, it’s all about the central bank put. Just ask … well, just ask anyone. From a Citi global credit survey:

“...over 65% of respondents said they believed action from central banks in Europe and the US would be the principal force driving credit index spreads [and] surprisingly, in a year with major political catalysts in Europe, and ongoing regional tensions in the Middle East and Russia, only 4% of respondents felt that geopolitical risk would be the major factor driving spreads.”

Even last week, when political tensions both in southern Europe and in Ukraine reached a fever pitch, Q€ front-running still appears to have been a controlling factor, at least in cash credit, as IG cash has diverged markedly from CDS. From Citi: “ECB QE already squeezing out the IG bond market? Seems cash investors aren’t waiting any longer to load the boat…

And with Q€ set to compress IG spreads, investors are getting squeezed into high yield:

We’ve heard this story before:

And so it goes. It appears even Grexit and the threat of a new Cold War aren’t enough to offset investors’ perception of the power of the printing press. Trade accordingly, but remember that "a few more episodes like the SNB's shocking, and confidence-crushing, reversal in January, and the faith in central banker omnipotence will slowly but surely start to evaporate, and as it goes, it will also reveal just how much risk there truly is in this biggest "frontrun-the-central-banks" bandwagon trade of all time.”