US10Y – No Panic Over Russian Snub

News headlines are flooded with Cyprus news this week after the EU bailout package for Cyprus has been announced. As part of the package, Cyprus is expected to tax banks on their deposits in order to raise 5.8 Bln EUR to finance part of their bailout in what EU calls “burden sharing”. This certainly didn’t sit well with depositors in Cypriot banks, and even endured the wrath of Russia’s Putin who came on record to label EU’s proposal as “dangerous” and “reckless”. This led the market to believe that Russia will help to alleviate Cyprus’s pain, especially since many rich Russians individuals and businesses have Cypriot bank accounts, not less Putin himself. The hope of Moscow’s intervention increased exponentially when Cyprus Parliament gave zero support to the EU proposal, and Finance Minister subsequently flew to Moscow to negotiate loan terms, famously saying ” We’re here until a deal is reached” after he has landed.

Daily Chart

This hope diffused the situation significantly, with US10Y prices falling after the huge gap higher on Monday. Price was kept below 132.70, the support back in early Mar and around the turning points back in Dec and Jan. The 10Y benchmark yield told us that fear is no longer escalating, but certainly investors are still far from relaxed, as prices were still supported firmly above 132.30, showing that the market is still cautious while waiting for Cyprus to announce a deal with Russia eventually.

Hourly Chart

However, that turned out to be wishful thinking as Sarris said just a few hours ago that the nation has failed to get financial support from Russia. So much for the “good beginning” that Sarris said after the initial talks. Russian Finance Minister Siluanov has come out and said that “talks are over”, placing a screeching halt to speculations of any form of Russian assistance. Ironically, Sarris has previously mentioned that Cyprus need to know where they stood before the weekend is over, and now that they know Russia is not a solution, he and his delegation to Moscow need to quickly formulate new proposals that will raise the required 5.8 Bln burden requested by the Euro-group. Even Sarris may not have guessed that things could have turned out so badly for him.

However, it seems the biggest victim of the failed trip to Moscow is Sarris’s ego. Market remains calm even though the Russian deal has now been officially called off. Initial reaction to Moscow failure is muted at best, with 10Y price barely moving more than 5 points higher. The 132.7 resistance is still holding, and the small rally that followed the hour after is basically continuing the upward trend seen since yesterday. If someone didn’t know that Russia has rejected Cyprus, he won’t know looking from the charts.

What does this mean then? Does market not care about Cyprus going bust?

Well, if we were to analyze the original reaction to the bailout package that was announced, it seems that the bigger reaction came when the levies were revealed. When senior Government officials from Cyprus claimed that “there was no way” the bill was going to pass, market actually started to recover. This view may be too simplistic, but it does explain current lack of reaction, and may also mean that the worst case scenario for EUR would be an acceptance of EU bailout package, rather than simply saying no and letting their own banks go bust.

Perhaps market is holding out for plan B – EU to relent and give cheap bailout money. Perhaps even the Russians want to call EU’s bluff as they believe EU will never allow Cyprus to fall as that would lead to high Euro-Zone instability. There is wisdom to this thinking, and Cyprus may yet get funds from EU without the onerous levy. However, just remember, nobody expected Sarris to come home with nothing to show just a few days ago. Expect the unexpected in this game of chicken.

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