Fed Forces Primary Dealers To Buy Ever More Short-Dated Paper As Corporate Bond Holdings Drop To Decade LowSubmitted by Tyler Durden on 07/09/2012 - 10:53
Earlier today, Bloomberg came out with an article titled "Dealers Declining Bernanke Twist Invitation" in which the authors make the claim that "Wall Street banks are increasingly choosing to hoard their U.S. bonds rather than sell them to the Federal Reserve as speculation grows that a slowing economy and global financial turmoil will only make them more dear." As the argument, Bloomberg points out ever lower Bids To Cover in the near-daily sterilized POMOs that the Fed conducts as part of Twist, which actually is a meaningful if very volatile argument and which may be far more impacted by how much money the New York Fed is letting banks skim off the margin in daily POMOs as ZH has discussed previously. More impotantly, BBG notes the record holdings of Treasury bonds by Primary Dealers (something we too did a month ago). It even goes on to quote 'serious people' - "People are not willing to sell Treasuries" said Thanos Bardas, a managing director in Chicago at Neuberger Berman LLC, which oversees about $89 billion in fixed-income assets, in a June 28 telephone interview. "The data in the U.S. doesn’t look as good. The labor market has lost momentum. There will be more upside left in Treasuries despite the low levels of rates." All this would be correct if it wasn't for one small detail: the distribution of UST holdings within the Dealer inventory. As we have repeatedly shown, once one looks at just what Dealers hold, the story flips diametrically. In fact, according to the most recent Primary Dealer data released by the FBRNY (as of June 27), of the $106 billion in Dealer Treasury holdings, a whopping 78% are in the 3 Years and under category, in other words precisely what the Fed is selling to the Dealers per Twist!
The sole driver of risk in the past 3 years has been nothing but continued pumping of liquidity into markets by central banks: aka the Global Central Bank Put. How does this look visually? The below summary charts showing global balance sheet expansions should blow everyone's minds.
The terrible trinity of a China harder-than-soft landing, a European depression/crisis, and now a US slowdown are all tied together in a burdensome bow by Punk Economics' David McWilliams in his latest must-watch macro clip. While people apparently still worship at the alter of retail, the Irishman notes that they are missing these three oncoming trucks. From the Politburo paniccing as "since dropping its Maoist fundamentals, the only legitimacy it has is growth" with "prosperity (not equality) for all" the latest slogan as he rhetorically asks "what's the Chinese for 'it's the economy stupid" as he notes that despite two rate cuts in a month, the problem is too much capacity (so building more simply makes things worse) - pushing commodities down. He rotates to the US where Obama's election-critical recovery is fading away noting the current impotence of the Fed to fix things in the real world. As the much-hyped recovery evaporates in the US, the euphoria of the latest EU Summit has vanished and McWilliams dives into the details of the desperate to-and-from between Germany and its neighbors (adding that France is economically all mouth and no trousers) "either Germany pays for everyone or the Euro falls apart" as he explains the dilemma facing massive refinancing needs of Italy and Spain with little to no growth and illiquidity - with German savings the ultimate arbiter (though poltically impossible given Merkel's election next year). "Even if the Germans paid for everything right now... it still wouldn't solve the core competiveness problem" leaving the world indeed stuck between a German rock and a global hard place. Eight minutes well spent for a succinct world view - and its not encouraging.
The French were willing to 'slash' retirement ages by a few days as the Greeks tied property tax payments to electricity supply in an effort to raise revenues but it seems the much-talked about austerity that is such a great hardship for Europe's non-German/Fins/Dutch is missing in action. Today we hear of the progress in Italy as la Republica explains the incredible provocation of the under-secretary of the economy Gianfranco Polillo that: "We are in a country where you work an average of nine months each year, and I think that now we must think that these nine months of work are too short," suggesting - shock, horror - that "if we gave up one week of vacation, we would have an immediate impact on GDP of around 1%". First of all - adding 1% from an additional week seems a 'stretch' but nevertheless as Wirtschaftsfacts notes that these comments only "reinforce the prejudices in the northern countries of the euro zone, that many employees are in the southerners lazy and workshy." So the next time we hear Monto proclaiming the need for Zee Germans to step up or the ECB to monetize, it is clear now what exactly he is protecting - his all-year tan!
When that canned remarks by Fed Doves is all that is left as a hope-based upside "risk catalyst", as was just defined by Citi's Steven Englander, things are really sad for those who have to justify their excess testosterone by trading every uptick (Econ Ph.D. dissertation on the topic most certainly in progress).
With a few hours until BoE's Paul Tucker takes the stand, the venerable institution has finally acquiesced to the Freedom of Information Act request from British MP John Mann and released all copies of emails and transcripts of telephone conversations between Tucker and Bob Diamond between 10/1/08 and 11/30/08. The emails make for some fascinating reading when one considers the sources of the conversation. The thrust of the discussion is Tucker's concern at UK Libor rates being considerably higher than US - especially as US rates were dropping; Tucker's 'shock' at the cost of funding for Barclays' government-guaranteed debt; and finally the explanation/admission for why the BoE's liquidity hosepipe was not fixing the solvency problem in British banks - a lack of eligible collateral. Smoking gun maybe; nail in the coffin of independent Central Banks for sure; hangings in the streets - we are not so sure.
Back in January, an article by Reuters' head financial blogger on the topic of the Greek bond restructuring, which effectively said that Greeks have all the leverage, prompted us to pen Subordination 101 (one of the year's most read posts on Zero Hedge), in which we patiently explained why his proposed blanket generalization was completely wrong, and why litigation arbitrage in covenant heavy UK-law bonds would be precisely the way to go into the Greek restructuring. 4 months later, those who listened to us made a 135% annualized return by getting taken out in Greek UK-law bonds at par, whereas those who listened to Reuters made, well nothing. What is amusing, is that such examples of pseudo-contrarian sophistry for the sake of making a statement, any statement, or better known in the media world as generating "page views", no matter how ungrounded in financial fact, especially from recent Loeb award winners, is nothing new. To wit, we go back to May 29, 2008 where courtesy of the same author, in collaboration with another self-proclaimed Twitter pundit, we read "Defending Libor" in which the now Reutersian and his shoulder-chipped UK-based academic sidekick decide that, no Carrick Mollenkamp and Mark Whitehouse's then stunning and quite incendiary discoveries on Liebor are actually quite irrelevant, and are, to use the parlance of our times, a tempest in a teapot. His conclusion: "What the WSJ has done is come up with a marginally interesting intellectual conundrum: why is there a disconnect between CDS premia, on the one hand, and Libor spreads, on the other? But the way that the WSJ is reporting its findings they seem to think they’re uncovering a major scandal. They’re not." Actually, in retrospect, they are.
All of the time wasted on firewalls and great deceptions worked in the short term but the height of a fence does nothing to help a horse or a nation which is sick inside them. Europe has vastly overspent and tried their best to whitewash the financials of the countries and the European banks and now, and each quarter out for some time; we are going to see a worsening financial landscape for the European nations and their banks. This will not be Armageddon or the end of the world but it is going to be quite painful and have a decided impact on the United States and perhaps the scaring may be deep. In Europe that have mouthed so much nonsense for such a long period of time that they have come to believe in what they have manufactured. This is not uncommon historically but the depth and breadth of it is without comparison. Germany says one thing to placate France and Italy believes the drivel that is touted by the Netherlands and now Greece wants the ECB to forgive their $238 billion in Greek debts on the basis of a united Europe, which would bankrupt the ECB, and then it becomes clear that someone has to pay for all of this and countries start banging on the doors of the asylum to get out. Listen carefully; the banging has begun and will grow loader and more raucous during the balance of the year.
Last week it was the Fairness Distributor In Chief threatening China with WTO action over its unfair duties on US car imports. Before that it was Europe trying to protect its crumbling trade at all costs with its primary trade partner. Now, it is China's turn to retort to the world's beggars, and all those who just happen to ravenously import its iWares with the reckless abandon of a gadget junkie. FT reports: "Beijing has threatened swift retaliation against a range of European Union industries if Brussels presses ahead with an investigation into government subsidies granted to two Chinese telecoms equipment companies. The Chinese threat was delivered at a meeting with EU trade officials in Beijing late last month that was arranged at the behest of Chen Deming, China’s commerce minister, to try to defuse a brewing trade dispute that is straining commercial relations between the two sides. Instead, it collapsed into acrimony, with the Chinese warning their EU visitors that they would respond to any investigation of Huawei and ZTE Corp by probing subsidies granted to European agriculture, automotive, renewable energy and telecoms companies. “Put it this way: it’s not like they went for a beer after and watched football,” one person briefed on the meeting said." None of this is new: recall China Lays Out Conditions Under Which It Will Bail Out Europe; Does Not Want To Be Seen As "Source Of Dumb Money" in which Li Daokui "added that Beijing might also ask European leaders to refrain from criticising China’s currency policy, a frequent source of tension with trade partners." Looks like we can scrap those "China bails out Europe" (ignore the fact that the Chinese economy itself is imploding for a second) rumor in perpetuity.
European equities have been grinding lower throughout the European morning, with basic materials seen underperforming following the release of a multi-month low Chinese CPI figure, coming in at 2.2%, below the expected 2.3% reading. The focus in Europe remains on the Mediterranean periphery, as weekend reports from Spanish press suggest that the heavily weighted Valencia region may be pressed into default unless it receives assistance from the central government. The sentiment is reflected in the Spanish debt market today, with the long-end of the curve showing record high yields, and the 10-yr bond yield remaining elevated above the 7% mark. News from an EU council draft, showing that Spain is to be given extra time to meet its deficit targets did bring the borrowing costs off their session highs, but they do remain stubbornly high at the North American crossover. The gap between the core European nations and their flagging partners continues to widen, as Germany sell 6-month bills at a record low of -0.0344%. As such, the 10-yr government bond yield spread between the Mediterranean and Germany is seen markedly wider on the day.
- Euro zone fragmenting faster than EU can act (Reuters)
- Wall Streeters Lose $2 Billion in 401(k) Bet on Own Firms (Bloomberg)
- Eurozone crisis will last for 20 years (FT)
- Chuckie Evans: "Please suh, can I have some moah" (Reuters)
- Quote stuffing and book sales: Amazon ‘robo-pricing’ sparks fears (FT)
- Situation in Egypt getting worse by the minute: Egypt parliament set to meet, defying army (Reuters)
- Chinese goalseek-o-tron speaks: China’s inflation eased to a 29-month low (Bloomberg)
- A contrarian view: "Barclays and the BoE have probably saved the financial system" (FT)
- Flawed analysis: Dealers Declining Bernanke Twist Invitation (BBG) - Actually as shown here, ST Bond holdings have soared as dealers buy what Fed sells: more here
- Obama team targets Romney over taxes, Republicans cry foul (Reuters)
- And all shall be well: Brussels to act over Libor scandal (FT)
- Bank of England's Tucker to testify on rate rigging row (Reuters)
Those following the EURUSD may be surprised by the rather violent spike higher in the past few minutes. Don't be: it is just the same old European unfounded speculation repackaged and regurgitated as headlines, in this case the following:
- EU SAYS NO SOVEREIGN GUARANTEE NEEDED FOR DIRECT ESM BANK FUNDS
Or, for those whose event memory has a one week cutoff, the exact same thing that the Euro summit from June 28 "concluded" sending the EURUSD higher by 200 pips, only to see it crash to 2 year lows in the week following after Germany made it clear this was not really the case. Turns out it is not really the case this time either:
- Details of how the future system will work remain to be negotiated: Commission spokesman Simon O’Connor
Cue responses from Finland, Holland, Slovakia and maybe, just maybe Germany, all of whom agree to disagree, and some of whom even demand collateral even for just EFSF borrowings.
Remember the running joke about Spain's constantly deteriorating budget? Or was that Greece's? No matter: there was a time when Spain was expected to hit a 5.3% budget deficit in 2012, and the Maastricht mandated 3.0% by 2013. So much for that. It turns out the Spanish economy has deteriorated so much in the last few months, that the EU had no choice but to grant Spain a 1 year extension, according to Europapress. In doing so, the EU has eased deficit targets for Spain by 1% in 2013, granting it a 6.3% deficit miss, a number which will be revised at least once more before the year is over, and the 2013 target is now widened by 1.5% to 4.5%. So much for serious deficit cutting. But let's blame "austerity" while we are at it. It would, however, be great if countries in Europe, or anywhere, were actually austere, and cut their deficits, instead of just blaming austerity for every economic problem while never actually enacting such policies (as we explained before). So while Spain gets an extension due to a "recession of rare violence", the trade off will be even greater supervision by the Eurogroup, or said otherwise, more people will watch how Spain does nothing to actually fix itself and then 6 months from now everyone will be shocked, shocked, when the 2013 deficit is over 8%. In other news, Spain 10 Year bond were trading at 7.08%, well wide for the day and about 20 bps shy of the all time record lows.