Bond

If someone is hell bent on breaking the bond market, they are doing a bang up job.

UPDATE: CARNEY DENIES NYT REPORT: "THERE IS NO DEAL" 30 Year plunging

Just breaking news from the NYT for now. 30 Year surging.

Up, down, up, down. The daily volatility in the 30 year is now openly inducing nausea in the $60 trillion bond market. But at least the Fed is clearly instituting price stability for 98 years running.

While the CDS market for various insolvent European names whose credit default swaps are trading 10 or more points upfront has become more or less nothing but noise, and the only true way to hedge risk exposure, courtesy of ISDA's advance warning that no matter what a CDS will never be triggered, is to sell cash bonds, the market for default risk is quite active for those names which still trade in a reasonable range: such as between 50 bps and 200 bps. And while the Bloomberg chart below demonstrates on an absolute basis the US is due for a two notch downgrade by S&P based on the recently observed spike in US default risk, it is DTCC data that is more troubling. As most revel in the latest nonsensical Group of 6 plan, the bond vigilantes are already quietly setting the trap.

Following last week's blatant secondary bond market intervention ahead of Italy's two auctions which even Willem Buiter predicted would need central bank intervention (ECB, but any would work), we were waiting to see if the ECB would announce an increase in its bond purchasing activity via the SMP for the week the passed. It did not. Which leaves just one culprit to explain the dramatic moves ahead of bond auctions (which naturally set the mood and allowed the primary issuance to proceed smoothly and not bring down the euro). China. And we venture to assume that it was China again who started buying bonds in the secondary market ahead of today's 4:30 am and 5:00 am issuance of €4.5 billion in 12 and 18 month bills and €1.25 billion in Greek 3 month bills, which resulted in the 10 year tightening -7bps to 1550; after it hit 1564bps earlier today, highest since at least 1998, while Italy's 10-yr yield over bunds tightened -22bps to 310bps vs yesterday’s 332bps, the highest since 1996. Yes this was before the auctions on no good news, and happened just as gold hit an all time high of just under $1610. Sure enough, following this sudden spike in buying interest, the auctions priced tremendously, and have resulted in a major shift in market sentiment in the past 3 hours, leading to a surge in Italian financial stocks, a jump in the EUR and thus a spike in futures.

Just because someone is dead set on making Apple the only flight to safety in the world (and Gold of course, but unlike the iPad one can't really eat this particular tradition), around the time (10 minutes ago) Obama threatened he would veto the Republican proposed vote to raise the debt ceiling coupled with a cap on spending and balanced budget amendment to the constitution, the selling off spilled over to Treasurys, which as the chart below demonstrates are broadly lower across the curve, but most emphasized at the 30 Year spot, which as Russ Certo says (see below) is being "dragged to the slaughter house." Alas, judging by bank trading today the 2s30s steepening is completely irrelevant for bank stocks, for the simple reason that i) nobody needs any new mortgages and ii) nobody actually pays their mortgages. This is the second day since last week in which there is coordinated selling in stocks and bonds. Expect much more bond weakness with each day there is no bond deal.

A default by Greece on the weekend of August 20th with IMF/EU secured financing in place would solve a lot of problems. Greece would get actual debt reduction and only have to re-prioritize who gets proceeds from asset sales. The IMF/EU would become secured or at least senior, making it more likely they get repaid on debt they have already promised to issue anyways. The IMF/EU can tell the banks that next time they ask for some voluntary help, they better get it, and they can tell their citizens they were tough on their own banks and on Greece. August 20th has about 8.5 billion euro of principle and interest payments due from Greece, and we all know the Troika likes weekends for big announcements because they have the most time to explain their plans and spin their story while the markets are closed.

Wait, what is this? Selling in both ES and bonds? Surely you jest: after all money just goes from one to the other right? Bzzzz. Wrong.

Despite empirical evidence that someone big stepped an and bought the bejeezus out of Italian bonds yesterday ahead of the Bill auction, and despite Willem Buiter's warning that tomorrow's critical BTP auction will fail absent ECB intervention, some of our transatlantic colleagues were panning long-winded essays that it is supremely irrational for the ECB to even think it can control the Italian bond market because of X, Y and Z. We, on the other contend, that precisely because it is supremely irrational is why the ECB will do it. And now we have evidence that if nothing else (and we will know for sure next week if the ECB bought the bonds after the weekly SMP details are released over the weekend, as else it would show that the PBOC is actively buying Italy bonds in the secondary market). And in the absence of actual buying, yoday we get another view at just how the ECB thinks it can manipulate markets. From Dow Jones: "Moody's junking Ireland is of particular concern "as many market participants have more hope for the Irish recovery story relative to Greece and Portugal," says ING rates strategist Padhraic Garvey. "Moody's have a different view." Garvey also says that the ECB asked for prices of sovereign bonds Tuesday but "there was no evidence that the ECB actually bought peripheral paper." Translation- the ECB sends out a OWIC (Offers Wanted in Competition), and dealers are supposed to soil themselves knowing full well that even if Trichet does or does not bid, other dealers may. Game theory 101.

A year ago we discovered that several European countries only managed to squeeze into the Eurozone by misrepresenting their total debt courtesy of Goldman Sachs facilitated currency swaps which misrepresented the true state of said countries' finances. Yesterday it was revealed that at least one Spanish region had been openly lying about its economic performance and underrepresented its budget deficit by about 50%. Today we go deeper into the rabbit hole, after a WSJ report discloses that European banks 'may' have been openly and frequently lying by misrepresenting to others about the amount of third party demand at any given bond auction. Think of it as the same BS that a bulge bracket bank in the US will use to sucker retail momo investors into a hot IPO. "A European self-regulatory body is looking at whether that perennial optimism might have at times been misleading for investors in the European debt markets, according to people familiar with the matter. The International Capital Market Association, or ICMA, is examining whether banks have been improperly exaggerating the amounts of investor demand they are seeing in certain bond sales, including for debt issued by European governments, these people say." Where does the rabbit hole lead next: someone discovers that the Bid To Cover ratio in all US bond auctions over the past several years have really been 50% lower than represented publicly? As for Europe: does anyone believe anything coming out of that continent anymore following the whole Jean-Claude Juncker fiasco? The Eurozone and the euro are both doomed and everyone knows it. But all is fair in love and perpetuating doomed ponzi pyramids (which is not to say that the US is any better).

Willem Buiter, Citigroup's chief economist and former BOE policy maker, told reporters in London today that "the ECB will intervene on whatever scale is necessary to allow Italy to conduct its auction on Thursday. If the ECB doesn’t come in, the Italian bond auction is likely to fail. What we’re going to have is the ECB are going to be doing the heavy lifting." To anyone who watched the sharp move in Italian sovereigns, so reminiscent of central bank FX intervention overnight, Buiter's conclusion is all too obvious. As we reported, there were extensive rumors, and certainly validated by trading activity, that either the ECB or the PBOC or both, intervened in the Italian bond market to make sure today's Bill auction priced, which it did, but absent the reinforcement of the central banks could have very likely failed. What is amusing is that it was just last week that reporters were querying Trichet why the ECB's SMP bond purchasing operation had been all but abandoned. Well, here's your answer: JCT was simply preserving his dry powder for all the upcoming contagion casualties, such as Italy first, then everyone else.

Busy economic calendar with two notable bond auctions out of the US Treasury.

The much ridiculed "MLEC-type" bailout proposal of Greece, which contemplates the rolling of existing debt into a guaranteed SPV, and which was the European rescue deux ex machina for exactly two weeks, appears to have been pulled off the table, following the announcement by German Deputy Finance Minister Joerg Asmussen to Reuters Insider TV that "Germany has put a Greek bond swap back on the table as a model for private sector involvement in fresh aid for Athens." More: "The model put forward by some French banks is still a good base for discussions and we are currently working on this. But since rating agencies have signalled that they will consider modalities (such as) the French proposal as a selective default -- that means a rating event -- we can also put other options like a bond exchange on the table." he said, adding discussions would take place over the summer break. Translation: back to square minus one. And actually it is much worse, because if Asmussen is aware of rating agency policy, a debt exchange would most certainly qualify for an event of default. Which confirms our initial expectation from a month ago that there is nothing absent a complete loss of ECB credibility that can possibly transpire next, as the ECB realizes there is no way around accepting defaulted Greek bonds as collateral. The only question is what happens then: will the market, head currently deep in the sand, scramble upon the confirmation that the ECB emperor is naked, or will it continue acting as if nothing has changed yet again.

Well this was unexpected: the rating agencies, for years and years patsies of their highest paying clients, have suddenly found their conscience, if not religion, and adamantly refuse to bend long-standing rules which qualify the proposed Greek MLEC/CDO type rescue as an event of default. Per Bloomberg: "The rating companies have signaled the plan would trigger because it is being done to avoid default, so couldn’t be considered voluntary, and because investors would be worse off than by holding the new securities." The ECB is so confused by this intransigence and unwillingness to bend to the will of the criminal cartel that earlier today the ECB's Novotny was complaining to Austrian TV about this unexpected demonstration of independence: "Debt rating agencies are being much tougher on potential private-sector contributions to Greece's debt woes than in past bailouts, European Central Bank Governing Council member Ewald Nowotny said on Monday. "We are conducting a very difficult conversation with the ratings agencies," he said."This is what we have to try to find: a way that on the one hand certainly involves banks without having this lead to a default as a consequence," he added. "I also must say it strikes me that the ratings agencies are being much stricter and more aggressive in this European matter than they were, for example, in similar cases in South America. I think this is something we will have to think over." As a result of all this sudden uncertainty, Bloomberg now speculates that the ECB will have no choice than to flip flop on its own adamant position of isolating defaulted collateral, and accept Greek bonds even in an event of default: “The ECB cannot remove liquidity from the big Greek banks,” said Dimitris Drakopoulos, an economist at Nomura. “This discussion is a waste of time. The ECB is going to back down in the end -- what can they do?” he added."

As the table below demonstrates, the bond vigilantes are now eviscerating the belly of the US Treasury curve: the weekly percentage move higher in the 5 Year yield is now the largest...Ever. For those wondering if PIIGS should be renamed to PIIS following the brief rescue of G, perhaps it is time to officially rename it PIISA.