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Monday, March 1, 2010

The bearish bets on Greece get unwound

Hah! What else was it? It was just another ruse to con people out of their stocks!

As though the Governments around the world would let a country fail!

Now even the WSJ can see the handwriting on the wall!

On Monday, the annual cost of insuring €10 million of Greek government debt for five years was €341,000, down 14% from last Thursday. The cost hit a peak of €425,000 on Feb. 4.

"You've already had a scramble to close out the short positions," said Gary Jenkins, head of fixed-income research at Evolution Securities in London.

Because investors are less worried about Greece, one of the trades that put pressure on Greek bonds has been scaled back. In that trade, investors bought credit insurance on Greece from big banks, which serve as market makers in cash and derivative trades. The banks were effectively betting in favor of Greece, so to hedge themselves they would sell short Greek bonds, which means they sold bonds hoping to buy them in the future at a lower price.

But less demand for credit protection means that banks have fewer reasons to short the cash bonds, which means fewer Greek bonds are being dumped on the market.

A dreaded short squeeze could hit investors. That happens when the price of a security rises, forcing investors who are short the security to cover their positions to cap the losses. A shortage of securities can make it more expensive to cover the bet, forcing investors scrambling to get their hands on the security to bid up its price.

Investors weren't worried about being squeezed because Greece needed to sell some €23 billion of debt by spring. That huge supply of debt meant that investors had plenty of bonds to buy if they needed to cover short bets.

But a bailout of Greece could mean the country won't have to issue as much debt to the bond markets. A good portion of what is issued could be bought by state-backed entities. That would cut down on the debt investors needed to cover the short trad

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