Portugal Bund Spreads Even Wider Following Substantially Reduced Bill Auction And Much Higher Auction Yield, CDS Hits RecordSubmitted by Tyler Durden on 02/03/2010 - 11:34
Europe bailout tracker update: Portugal edition. Hey Almunia, is there anything to be concerned about in Portugal? We thought so... The country's 10 year spread is now 18 bps wider to 147 bps after the country just had an almost failed BILL (12 months) auction. The country had previously announced an indicative offer of €500 million in 12 month bill to be auctioned. The result- a sale of just €300 million at yields over 50 bps higher compared to just two weeks ago. Oh, forget Greece, Portugal CDS is now trading at record wides.
As David Rosenberg points out, "what a difference a year makes." Here is the compare and contrast. And some observations on why real GDP, absent non-recurring stimulus benefits, was more than 7% lower in Q4 compared to the disclosed number.
Mutual fund flows, or the absence thereof, have drawn some recent attention as related to the price movement in the domestic equity market. The following analysis looks at this topic in addition to some other useful observations including seasonality, historical net new cash inflows, taxable bond funds, corporate spreads, and treasuries.
Treasury's Quarterly Refunding Statement Released, $81 Billion In Refunding Auctions On Deck, Second Reopening Of 10 Year TIPS ComingSubmitted by Tyler Durden on 02/03/2010 - 10:34
The Treasury has just released its Quarterly Refunding Statement which indicates that refunding auctions will amount to $81 billion, the same as the amount announced in the November refunding. Furthermore, the auctions sizes are also unchanged from November. The UST noted that after increasing consistently, auctions sizes will finally "stabilize at current levels" and that it is also weighing eventual cuts in coupon auction sizes. With individual tax collections plummeting we wish them all the best as they try to plug the balance with hot air. Notable was the announcement that the UST is considering raising the frequency of its TIPS auctions, as well as a reopening the 10 year TIPS.
Never a boring day for Joaquin Almunia. Over the past two weeks, the commissioner has been busy trying to persuade anyone who is willing to listen that not only would Greece not be bailed out, not only would the country somehow reconcile its 140%+ Debt/GDP ratio and record budget deficit in order without a civil war, not only are various €40 billion GGB certificates popping up all over the price irrelevant in the grand scheme of things, but that the EMU is actually a viable concept, long after anyone who does not believe in the tooth fairy realize that it is only a matter of time before fallout in the periphery tears the Union apart. And highlighting the amount of tragicomedy in Europe's "connected vessels" alchemy-risk experiment is the symbiosis among PIIGS risk: indeed, as Greece Bund spreads have tightened by 10 bps to 343 bps, those of Portugal have widened by a much greater proportional level, and are now 15bps wider at 144 bps. Europe is now one big, cracking dam, holding back a toxic surge of mismarked securities, and a scurrying Almunia is using each and every available finger to plug the PIIGS holes. We wish him all the luck in the world.
Pimcos' El-Erian Warns About Irrational Exuberance, Sees January Sell-Off As Harbinger Of Things To ComeSubmitted by Tyler Durden on 02/03/2010 - 09:52
"Judging from market valuations, I sense quite a gap between consensus market expectations and key political and economic realities, especially in the U.S. If the gap isn’t bridged by the validation of the more optimistic expectations, investors may well find that January’s global equity sell-off was just a precursor to a disappointing year for several asset classes, including stocks." - Mohamed El-Erian
If only there were more journalists like Dylan, the vast majority of America's population may well have been on its way to grasping the gravity and the real implications of our current unprecedented wealth transfer paradigm, which the President, despite increasing "political points" rhetoric and recent attempts, such as the Volcker Rule, to if not stop then at least delay (thank you teleprompters), has been instrumental in blessing. Between TARP, guarantees, direct cash investments, and the trillions in implicit benefits from the record steep yield curve, the only beneficiary from the existing financial environment is the banking system, period. That this money could be put to much greater use elsewhere is without question: if these trillions had been invested in education, tech and research, America could now be on the verge of another technological revolution. But it is now too late (and, yes, this does account for marvels such as the Kindle - now if there was only a cool looking gadget that would force more Americans to learn to read). Looking back many years from now, the sad legacy of this administration will not be some vaunted healthcare reform, but the unprecedented amount of capital that shifted away from the nation's working class to the nation's "financial innovation producing" class.
- Quants ideas sink market, cause ruin (Bloomberg)
- Norges Bank keeps policy rate on hold at 1.75%, Krone drops (Norges Bank)
- Almunia endorses some imgainary plan according to which Greece "promises" to cut its budget (Bloomberg, and Bloomberg)
- This should come as no surprise to anyone at this point: Turn On, Tune Out, Drop Out: CNBC ratings get smashed (Wall St. Cheat Sheet)
- Greece rattled by hidden debt controversy (Telegraph)
- AIG Set to pay $100 million in bonuses this week (WSJ)
- Bank of America to pay average banker bonus of $400,000 (Bloomberg)
RANsquawk 3rd February Morning Briefing - Stocks, Bonds, FX etc.
It appears that the upcoming NFP report due this Friday will be a doozy. With estimates all over the place, it seems that the actual number will be anything but what is reported due to at least four fudge factors that will likely end up stretching reality extensively in either direction. Knowing this administration's propensity to hand out blue pills with reckless abandon, it is our guess that Goldman is probably underestimating the "real" number, although we were proven wrong the last three times we distrusted the Hatzius/Tilton crack economic team.
You hear the bull story every day on TV and from the likes of Tom Friedman. Michael Pettis and Chanos take the bear side. Below is a recent must-watch, hour long presentation by Jim Chanos, courtesy of Peter Schiff.
If there is one thing the rating agencies can be proud of, it is... well, there isn't one. And if after yesterday's mindboggling budget proposal which sees the deficit increasing to $9 trillion in 10 years, coupled with the fact that GSE liabilities now should be counted as part of overall US obligations, neither S&P nor Moody's could muster enough courage to at least put the US on even the weakest form of downgrade review, one can say that after 2 years of pretending otherwise, both rating agencies are still as [clueless/corrupt] as always. Then one barely visible silver lining, the following disclosure from Moody's in the report released today:
The ratios of general government debt to GDP and to
revenue are deteriorating sharply, and after the crisis they
are likely to be higher than the ratios of other Aaa-rated
If the current upward trend in government debt were to
continue and become irreversible, the rating could come under
downward pressure. The trend and the outlook would be more
important than any particular level of debt.
ABC Consumer Index Drops To Lowest Reading Since Fall, Divergence From UMich Propaganda Reading At RecordSubmitted by Tyler Durden on 02/02/2010 - 19:40
The most recent ABC Confidence index came in at -49, just five points higher than the all time low of -54 set last January and is now at the lowest level since last fall. The prior week reading was -48, and the consensus for this week was -45, implying a substantial miss from expectations. The persistent deterioration in this index is increasingly at odds with other consumer readings, considering that the other two CONfidence indexes , the UMichigan consumer sentiment and the Conference Board consumer confidence index both increased in January from the December readings. Currently the relative divergence between the ABC index and the UMich and Conference Board is at record wides. We sincerely hope that the government will soon come out with an index that tracks the credibility of all its other indexes.
Open Letter To The Treasury: Use The Short Squeeze In The FN/FH 5s/5.5s Bonds To Support An “Auto-ReFinance” ProgramSubmitted by Tyler Durden on 02/02/2010 - 19:09
"On August 27, 2008 we published “An Open Letter to the Department of Treasury” where we advised the Government to buy $500bn FN 5.5s (then trading at 98-16) and fund it by issuing $500bn Treasury Five year notes (then priced at 3.02%). [Note: CMM vs. 10CMS was at 135bps]
Soon afterwards, they took our advice in spades, eventually agreeing to buy $1.25Trillion MBS bonds. This has lowered the Par MBS rate by over 140bps and tightened spreads by 70bps. (Actually, 165bp and 125bps respectively from the Post-Lehman wides.)
Unfortunately, this policy brilliance has not been executed in the most optimal manner. This has resulted in a missed opportunity to reach deep into the market to help those homeowners who are most distressed." - Harley Bassman of BAS/ML
We start with Fixed Income. With supply next week and unemployment report on Friday we had a preference being short fixed income this week. Technically we see that on the bund we have been in a narrow 123/123.65 range, and the slow stochastic is about to turn which has not generated a false signal in quite some time for that market that decent sell-off of at least 2 figures is on the way. 10Y treasury futures have held the 118-10 resistance but curiously look like they are in the process of doing a 5th wave up with potential between 118-27 and 119-05. It is not ou preference to view the recent price action as a bullish impulse with respect to the overall market dynamic since the highs last March but we remain cautious about the possibility of extending further on the upside. The bund paints a slightly more bearish picture for now. Still we are fairly overbought here and we think the risk reward is tilted to the downside. People who do not wish to express this view directionally can engage in a 5s/10s flattener (charted here using implied yield on the future). We see that we are back testing the former wedge support as resistance and we are fairly close to the highs excluding the post-lehman spike in the curve. Negative carry on the position is only 9bps per quarter so it is not too expensive to hold the position as well.