High yield bond markets are another victim of the "new normal"
Imperial Washington is truly running amuck in its insensible confrontation with Vladimir Putin. The latest round of new sanctions is a counter-productive joke. But it is the larger narrative that is so blatantly offensive - that is, the notion that a sovereign state is being wantonly violated by an aggressive neighbor arming “terrorists” inside its borders. Once again, the American Warfare State has confected a false narrative to justify policies and missions that have nothing to do with the safety and security of the citizens of Lincoln NE and Wooster MA. Unfortunately, false narratives are what the Warfare State does.
Equity markets were lifted on a sea of USDJPY stops this morning to open higher and press to the week's highs. Once 102.00 was achieved and Europe closed, headlines started to stall stock exuberance. The initial downturn was when BES cancelled its shareholder meeting, the dip was bought, then Europe unveiled its sanctions started to take stocks down and then the US unleashed a further round of sanctions targeted at banks and that dragged stocks to the lows of the day. Trannies were worst down 4 days in a row. This move merely caught stocks down to bond's less-than-exuberant day. Treasuries rallied with yields dropping 2-3bps on the day. The USD surged to 6-month highs, ending up 0.2% from Friday. Credit markets continue to sell off notably. VIX closed back above 13 (highest in 2 weeks). The Russell is -1.65% YTD and 4.5% in July (on course for worse month in over 2 years). It appears sanctions fears trumped turbo Tuesday.
With hours to go until Argentina's grace period runs out and default occurs, investors are less than frantically selling Argentine bonds and pesos. They are lower but do not appear in full panic mode as we presume investors cling to hope that Argentina folds and pays off the holdouts (though there has been no sign of that so far). ARG 2033 bonds are down 3 points to 81 and the black-market peso is modestly weaker at 13.0 (near its record lows). Argentine CDS tightened modestly (as BofA warns the facts surrounding Argentina’s bond payments continue to be unique and deciding if CDS are triggered could take longer than expected) but 1Y CDS are holding at 4600bps (equivalent) - a 52% probability of default. Paul singer continues to defend himself (and the holdouts) from claims they are "dangerous fundamentalists" hell-bent on making it impossible for foreign sovereigns to restructure their debts.
If yesterday's 2 Year bond auction was a snoozer, today's 5 Year was anything but. First, the pricing was solid, and while the high yeild of 1.72 was the highest since May 2011, it stopped 1.2 bps through the 1.732% When Issued. The Bid to Cover was also solid, rising from 2.74 to 2.81, the highest since March and now appears to have decisively broken the downtrend in BTCs seen through the end of 2013. The most notable features of today's auction however were the internals, where we saw the Direct takedown soar from 9.3% to 25.9%, the second highest on record and only lower than the 30.4% in December 2012. And while Indirects were again flat like in yesterday's auction at 48.2%, it was the Dealers who had to make space, and the resulting Dealer allotment of 25.9% was far lower than the 38.2% in June, and the lowest in auction history.
This morning makes as much sense as most mornings. US equity markets, after some weakness in the European session have been lifted wholesale towards Friday's highs on the heels of a USDJPY 102 stop-running algo. At the same time bonds are being bnought aggressively with 10Y and 30Y yields now lower on the week. The USD index is surging higher on EUR and GBP weakness and commodities are sliding.
Here are the two most important charts which explain why the stock is crashing over 11% after hours.
The attached Barron’s article appeared in December 2007 as an outlook for the year ahead, and Wall Street strategists were waxing bullish. Notwithstanding the advanced state of disarray in the housing and mortgage markets, soaring global oil prices and a domestic economic expansion cycle that was faltering and getting long in the tooth, Wall Street strategists were still hitting the “buy” key. In fact, the Great Recession had already started but they didn’t have a clue: "Against this troubling backdrop, it’s no wonder investors are worried that the bull market might end in 2008. But Wall Street’s top equity strategists are quick to dismiss such fears."
Clear examples of how the wrong regulation HURTS the US consumer, and how to do something about it.
The most notable fact about today's $29 billion auction of 2 Year Notes was that the final yield of 0.544%, which stopped through the 0.546% When Issued, is that this was the highest auction yield since May of 2011 when the paper, since matured, priced at 0.56%. Considering some at the Fed anticipate the Fed Funds rate hitting over 4% by the time this bond is supposed to mature, either the Fed hawks or the market is wrong.
Which appears more likely - a straight-line extension of the past two years' rise in stocks, or another "impossible" decline to complete the megaphone pattern?
“Property companies are facing huge debt burdens,” said Sun Binbin, a bond analyst at China Merchants Securities Co. in Shanghai. “If the regulator hadn’t eased, there probably would have been more defaults.” Or, translated: if the companies weren't allowed to "fix" their huge debt burdens with even more debt, it would have been a complete catastrophe.
With 2 days until the 30-day grace period for 'negotiating' the already defaulted upon bonds is over and Argentina is once again dumped from the public markets, the demands for a "continuous mediation" by Judge Griesa appears to have fallen on dear ears. Bloomberg reports that the Argentina delegation will not meet with the mediator today.. and Argentina bonds are tumbling (and CDS soaring). Markets are implying around 45-50% chance of a default being triggered, which, as Jefferies noted last week, seems low. Argentina's black-market peso (blue dollar rate) weakened to 12.75 (just shy of its weakest ever at 13.00) implying a 50% devaluation over the peso.
European peripheral bond yields have compressed from "whatever it takes" highs to "whatever..." lows in the last two years as no amount of factual representation of the dismal reality of Europe's non-recovery can affect the centrally-planned virtuous cycle of ECB carry-trade funded idiocy occurring in the bond markets. Theoretically, Draghi's removal of the credit risk/convertibility premium has left these bonds to trade on growth/inflation expectations alone... and at record lows, they don't seem too hopeful. While Spain 10Y dropped below 2.5% (and we could list 20 fundamental factors that flash red), we thought it ironic that as Italy's 10Y drops below 2.7% for the first time in history it is delinquent on $100 billion in services rendered to its private businesses.
- The market in one sentence: Buying on Dips Pays Most in Five Years as Stocks Rebound (BBG)
- Europe subdued, Russia shares tumble on new sanctions (Reuters)
- Chinese Data Don’t Add Up (WSJ)
- Argentine Default Drama Nears Critical Stage (WSJ)
- Global Pressure Mounts on Israel to End Gaza Fighting (BBG)
- Ukraine troops advance as experts renew attempt to reach crash site (Reuters)
- Prospects Brighten for Republicans to Reclaim a Senate Majority (WSJ)
- Europe’s banking union faces legal challenge in Germany (FT)
- Investors Bet on China's Large Property Developers (WSJ)
- Hague court orders Russia to pay over $50 billion in Yukos case (Reuters)