Bond

Treasuries are trading at levels not seen since the depth of the 2008 Crisis. We just had a TIPS auction close at a negative yield for the first time in history, meaning investors are willing to LOSE money just to park it with bonds that supposedly adjust for inflation (TIPS adjust based on the CPI which is nowhere near the REAL rate of inflation… see tomorrow’s essay for more on this), and US corporations have ALREADY issued $217 billion in junk bonds this year, even HIGHER than last year’s RECORD.

As we noted yesterday, Goldman was in the market for a 50 year bond at a token amount of $250 million. We speculated this was merely a test to gauge market interest in the space. Sure enough, courtesy of the Fed's free money, interest was massive, and today, Goldman announced that the deal was upsized. Not only that, but price talk has been reduced from 6.25% to 6.125%. What this means is that bank after bank is about to begin rolling out 50 year and possible longer dated debt issuance, as investors no longer care about bullet maturity repayment but are all looking for yield. And it appears that anything over 6% will get massively oversubscribed, maturity be damned. After all, it is other people's money (hopefully).

Belgian bund spreads this morning are modestly tighter, at 81 bps, down 6 bps on the day, after Belgium completed a "successful" bond auction, which was no doubt intermediated by the ECB, as has been the case in all the problematic European bond issues over the past six months. As to how successful it was, the broad drop in the Bid To Cover, coupled with the surge in interest rates, especially in the 3 year, leaves quite a few open questions. Below are the results.

Poor Angela Merkel - being completely unable to do any monetary intervention without incurring the anger of a hawkish population, the chancellor is limited in her ability to intervene in the FX market. Which is why her most recent attempt to generate some Euro weakness appears to have had a diametrically opposite effect. Reuters quotes the chancellor as having said that recent euro weaknesses have not been overcome, and have been merely shielded for now, using EU and IMF rescue packages. In other words please sell the EUR. She has also sees major risk of protectionism, and supports the Sarkozy initiative to put currencies on the G20 agenda. Of course, all this FX warfare-lite is for nothing, as the market is invigorated by a Medley Global Advisors report that a Fed announcement to "aggressively" buy bonds is imminent. At least we now know that even if it sucks at everything else, the Fed is great at leaking stuff to the highest bidder. Regardless, first of all, this is a total bullshit plant. And second, just how is that news again? We have long claimed the Fed will have no choice but to buy at least $1.5 trillion. Even permabull Jim O'Neill said so on Tom Keene last night. But yes, lets price in QE2 a little more with some worthless rumor. After all the plunge in BAC must be halted at all costs.

Reuters has just released a stunning special report detailing how the Fed leaks all important, non-public, and ever so material, information to private parties. From the report: "On August 19, just nine days after the U.S. central bank surprised financial markets by deciding to buy more bonds to support a flagging economy, former Fed governor Larry Meyer sent a note to clients of his consulting firm with a breakdown of the policy-setting meeting. The minutes from that same gathering of the powerful Federal Open Market Committee, or FOMC, are made available to the public -- but only after a three-week lag. So Meyer's clients were provided with a glimpse into what the Fed was thinking well ahead of other investors."

Apparently in Ireland, a global stock market that surges up 10% in a month to celebrate the latest obliteration of the purchasing power of the American middle class is considered "turbulence." This is precisely the excuse given by Irish PM Brian Cowen when asked why he has cancelled all bond auctions for the rest of the year. Surely, the market is buying it. Cowen also added that he doesn't need funds at rates of 6.8 to 6.9%. What is hilarious is that he will need the funds much more in 3 months when the rates are double that, now that the country is openly nationalizing each and every bank, and will fund these "acquisitions" with tens of billions it doesn't have.

Apparently the reach for yield knows no bounds. The junk bond market is returning to the bad old days that we saw the last time this market topped in 2007. Inferior credits are now flooding the market with dubious conditions, lax covenants, but premium terms. Banks may not be willing to lend, but investors of every stripe are more than happy to. Investors are once again paying Rolls Royce terms for jalopy credits. (JNK), (HYG), (PHB).

When a central bank says it is effectively LBOing Keynesianism, you know it is over. Which is precisely what Guido Mantega, Brazil's finance minister has promised to do. The Latin American country which has been caught in the crossfire of developed world central bank wars, in which it is every last man for himself and he who defects first wins, has just stated it is about to defect (and just in case it is unclear, Mantega clarified that "Brazil's would act on the currency, not just a promise"). And to confirm he means business, Mantega also added that the Brazil Central Bank has no limit to buy dollars. But here's the twist - as reported by Bloomberg, Mantega, speaking to reporters in Brasilia, said the Treasury can sell more debt to increase liquidity to buy dollars.  You heard that right: debt-financed currency intervention. At least the trade surplus countries use capital generated from excess exports. Brazil is threatening to do something never before seen, which is to lever up in its FX intervention. Surely, this has to be the last boundary of Keynesian insanity.

The Portuguese auction earlier today was a smashing success, of one considers a rise in the Bid To Cover at the expense of an interest rate increase by over 1%, smashing. The 4 Year bond came at 4.695%, while the 10 Year priced at 6.242%, both printing 100 bps wider than previous. This mirrors the deterioration seen in the recent Ireland bond auction, where the same dynamic was observed. The European periphery is paying ever more to roll its maturing debt. Just wait until these countries have to refi short-term debt at 2%+ differentials: not even the ECB will be able to save the countries from that particular toxic debt spiral.

Today's market ripping false strawman (as if the ECB would let the Irish bond auction fail) was the issuance of €1.5 billion in 3.5 and 8 year bonds out of Dublin. And with yields a full percentage point higher than before, ECB backstopped banks using the newly purchased Irish bonds as collateral with the ECB, and/or the ECB picking up who knows how much itself, today's auction was a smashing success, if one can calls paying 6% for 8 year bonds success. But the market apparently loves ECB interventions so much it has tightened Irish CDS by 15 points on the day. Full results are as follows.

Just headlines for now, but this likely means the Greek bond roadshow has been cancelled as not even the world's best underwriters were able to generate enough interest for the imminent disaster that will be Greek bonds. One can only imagine how much horror must have gotten uncovered during the roadshow process if investors, even with the backstop of the ECB's endless guarantees, have said "no mas." Luckily, Moody's earlier gave a provisional rating of AAA to the European Financial Stability Fund (EFSF), which it now appears will be used imminently, first for Greece, then Ireland, and then everyone else who comes to the trough. If this news doesn't send the S&P over 1,220, nothing will.

Stocks are headed for a big multiple compression. Go long the beneficiaries of the relentless running of the printing presses in Washington. Once the spike in interest rates starts, it will be “a big, big bear market,” that could go on for decades. An exclusive interview with the legendary hedge fund manager, Bill Fleckenstein, on Hedge Fund Radio. (GLD), (NEM), (AEM), (GG), (TBT), (TMV), (VZ), (AAPL), (FXC), (CYB), (CU).

Last week, the municipal bond Crisis began in earnest when the capital of Pennsylvania, Harrisburg, dropped $3.3 million worth of municipal bond payments for the month of September.

This is just the beginning. Collectively US states continue to face massive budget short-falls in spite of massive Federal Aid. According to the Center on Budget and Policy Priorities, US states are expected to run deficits of $144 billion and $119 billion in FYs 2011 and 2012 respectively, unless they can cut spending further or raise taxes dramatically to close these gaps.

The 3 1/2 point sell off in the futures for the 30 year Treasury bond (TBT), at the end of last week was the sharpest drop in 18 months. All it took to set was for Q2 GDP to come in at 1.6%, and for Ben Bernanke to remain silent about any plans to flood the markets with more liquidity. After yields bottomed in 1956, bonds suffered negative returns for 30 years! Here come the 18% mortgages. One more equity puke out in September could easily give us the real thing. (TBT), (TMV), (TIPS).

Financial shills often use the term “bubble” to conjure up images of imminent collapse. Thus, if the “bubble” doesn’t burst within two weeks of someone’s “bubble” proclamation, then this non-event provides loads of verbal ammunition for the financial shills to improperly validate their erroneous viewpoint that a bubble does not exist. And this guerilla tactic works for those that truly don't understand the definition of a Central Bank, artificially engineered "bubble."