Citigroup bond trade memo is revealedBy Päivi Munter in London Published: February 1 2005 02:00 | Last updated: February 1 2005 02:00Citigroup's huge trades in the eurozone government bond market in August - described by Chuck Prince, chief executive, as "knuckle-headed" - came shortly after an internal memorandum spelt out how the US investment bank could "very profitably" destabilise the market. The memo, obtained by the Financial Times, outlines a strategy to shake up the eurozone market, where trading margins have contracted because of transparency and stiff competition. The document - dated July 20, two weeks before the trades - says Citigroup wanted to "turn the European Government bond market into one that more closely resembles" the less transparent US Treasury bond market, which is dominated by a smaller number of investment banks."Over time, this may help to kill off some of the smaller dealers," it adds.A Citigroup spokesman said: "As this is the subject of regulatory enquiry, we are unable to comment other than to say this memo is filled with inappropriate and unrealistic statements. It was not seen by, nor does it represent the views of, the supervisors who approved the trade, nor of the firm."The memo is likely to fuel the indignation of eurozone governments, many of which have lowered their borrowing costs since the euro's launch six years ago. It may also weigh against Citigroup in regulatory investigations of the trades, being led by BaFin of Germany and the UK's Financial Services Authority. Entitled "Challenging the dominance of Eurex futures", the document outlines a plan to take advantage of liquidity differentials between the German government bond [Bund] futures and cash bonds traded on the EuroMTS electronic system. "We should be able to exploit this situation in a very profitable way," it says.Eurex, the Frankfurt-based derivatives exchange, is the most important trading venue for eurozone government bonds, as its German government bond futures are used to price all eurozone government debt.While trading activity on Eurex fluctuates because of seasonal factors and economic conditions, liquidity on MTS is much more constant because it obliges its dealers to provide continuous price quotes. "When there is a liquidity imbalance ... we drive up the Bund future [and] then hit out all the cash [bids] on MTS," says the memo.On August 2, Citigroup stunned the market by selling €11bn of cash bonds in less than two minutes. About 30 minutes later, the bank bought back €4bn of the bonds at lower prices, making a profit of about €17m.The explicit intention to destabilise the Eurex futures is likely to strengthen the hand of German prosecutors, who last week launched a criminal probe into possible market manipulation.The memo, apparently written by Simon Wivell of Citigroup's European government bond trading desk in London, is addressed to Daniel Leadbetter, another member of the same team.