Bond

D'oh!

They gave us the “Minsky Moment.” Its sequel was “Shaking Hands with the Government,” followed by “the New Normal.” As you may know, these are Pimco’s pithy phrases used to describe the investing world as they view it. The first two were notably accurate narratives of what was occurring and how investors should respond. The jury remains out on “The New Normal” since it is a longer term prognostication. Why are we focusing on the etymology employed at Pimco? Unbeknownst to us, in his March commentary, Bill Gross unveiled the latest catch phrase, “Unicredit Bond Market.” Gross explained that “If core sovereigns such as the U.S., Germany, U.K., and Japan ’absorb’ more and more credit risk, then the credit spreads and yields of these sovereigns should look more and more like the markets that they guarantee.” Anyone who has been paying attention in any financial market the past two days will recognize that this trend, which has been developing around the globe over the past several months, has come home to roost in the United States as the 10 year swap spread has inverted. - Mike O'Rourke, BTIG

Remember yesterday's 2 Year which closed at 1.000% and everyone was so happy? Oops. One short day later and the bond has hit 1.11%, leading to "massive" (not our word) losses for all those who bought on expectations that the 2 year part of the curve would be subsumed by the Fed's "near term" part of the window. Not happening. The weakness from today's 5 year as well as various other factors have contributed to one of the biggest broad curve sell offs so far in 2010. With about a trillion in issuance still to come in the near future, things are only going to get uglier.

Yet more countries are anticipating the Fed finally killing the dollar sooner or later, as Spain now joins Portugal in issuing dollar-denominated bonds. If Europe's most insolvent countries (granted, Greece has yet to issue $-denominated debt, although we are confident that will happen shortly as well) are getting on board of the asset side of the Fed's balance sheet, it can only mean one thing: the InTrade odds for the winner of the currency race to the bottom are squarely in favor of the US currency. Earlier, the Spanish director of Treasury and financial policy Soledad Nunez, told reporters that Spain may issue a dollar bond via syndication. In a page right out of Greenspan's dictionary Soledad said: ""Usually we syndicate in dollars, and we have not made one yet this year, and we may do so, maybe yes, maybe no. That is the answer." She added in Alan-speak: "Doing a dollar syndication is always in our strategy, it is always depending on market conditions." Translation: we bet that, at the end of the day, Ben Bernanke will be far more successful in killing his own currency, than those bumbling buffoons over in Luxembourg.

The bond vigilantes are back in town as indicated by the blowout earlier in the month in sovereign credit spreads of the PIGS (Portugal, Ireland, Greece and Spain), and widening of corporate spreads over Treasuries. It was precipitated by Greece’s catastrophically high fiscal deficit (13% of GDP), debt (120% of GDP) and current account deficit (10% of GDP), numbers that imply default is likely. Bond investors have reassessed risk in a number of countries whose fiscal position is tracking Greece’s. - Boeckh Investment Letter

The Greek 10 year bond issue priced at a reoffer of 98.942; It came with a 6.25% coupon, and priced at 300 over midswaps or 326 bps over the January 2020 Bund. The bond pays annual interest: what are the InTrade odds that even one coupon gets made on this issue?

Greece has finally come to market with a 10 year bond, catching the very end of the offering window, through a €5 billion bond issue, which according to Petros Christodoulou-spread rumors, is nearly 3 times oversubscribed. Underwriters Barclays, HSBC, NBG, Nomura and Piraeus Bank are alleged to have collected nearly €14.5 billion in bids. We wonder how much of that is merely basis trades being fillled on the cash side. "We are very happy with the bid because the re-entry into the market is always challenging. It went very well," Petros told Dow Jones Newswires. Greece has cut price guidance on the bond from 310 bps over mid-swaps to 300 bps, with books closing at 11am GMT. Pricing is expected later today. Assuming this bond offering closes successfully, Greece will have enough money to last it for at least 30 days, joining such other illustrious countries as the United States, in living bond auction to bond auction.

Petros Christodoulou, most famous for having worked previously at Goldman, and now incidentally the head of the Greek Public Debt Management Agency, has told Market News that while he has no comment on the timing or tenor of the new issue (we venture to assume the timing will be in the next two weeks, as after that Greece be bankrupt for real), he is willing to wait and "allow the market time to digest" the announcement of today's austerity measures. (And if these don't work, the next round will promise Greek workers will pay the government for the privilege of having a job.) Of course, the implementation of these measures is subject to a mass rioting contingency, so while the verbal diarrhea out of everyone who is axed in the viable Greece trade continues, actual actions will be few and far between.

There is nothing quite as liberating as jumping on the bandwagon of scapegoating that which one does not understand. The idiocy of the chorus which blames CDS "speculators" for the mysterious kidnapping and rape of the Easter Bunny and Santa Claus' stomach stapling, not to mention the imminent Greek implosion (NOT as a function of a funding crisis, but due to the one soon to be unending strike, which will commence once Greeks realize their wages are about to be cut by 250% and the new retirement age will the same as that of Yoda), is just getting surreal. And if the cheap seats housing the portly derrieres of all those CDS "experts" need yet more proof just how full of excrement their pointless multi-syllabic exhortations are, we present Credit Trader's very diplomatic presentation (diplomatic, because our version would have included a preponderance of breathless f-bombs, which is why we wisely decided against writing one), which is sufficient and necessary to hopefully shut all these empty chatterboxes up for good. Alas, that ain't happening. Either way, here is the data, which will certainly not make an impression on anyone except those why actually do understand how the CDS market works. For everyone else (the "it's like selling a warehouse full of feces... in backwardation, thank you speculators... buying crap insurance on the warehouse and then redirecting the Chipotle lunch hour crowd into it" people), start writing your disgruntled, opinionated and Thesaurus-worthy retorts. Oh, and by the way, are speculators guilty that CDS spreads on Greece have collapsed by over 120 bps in the past two weeks? Oddly, we have not heard anything about that at all in the idiotstream media.

With February over, and the equity market just slightly down MTD, the January weakness in equities has finally spilled over to High Yield, where we are flowing in a see of red. This was to be expected considering the two nearly $2 billion HY fund outflows experienced in February. Below is the complete heatmap for February HY bond price performance by subsector. Each issue is presented on a size relative basis, with the grayed text giving detailed information about any one specific issue, including corporate ticker, one month change, ISIN, Name, Rating, Outstanding, and last price (compared to January 31, 2010, red is lower, blue is higher).

As the roadshow was initially scheduled for the second half of February, this implies that the Greek bond offering is, for now, history. Furthermore, no new roadshow data has been set. It is unknown whether this is due to the massive deterioration in Greek financial perceptions over the past week, or if because the government has managed to arrange a private loan with Deutsche Bank (which hopefully does not have a downgrade put trigger as that would be the shortest loan in history).

Ah, curve pancaking - better known in bond parlance as the death rattle. The Greek 4 Year GGB just traded wider of the 15 Year at a spread of -4bps (yup, negative). This, to continue the parlance lesson, means the bond vigilantes are now pretty sure how the Greek situation will play out. Oh, and Greece, all the best with that €5 billion10 year bond issuance. The 1 Year spot his exploded from just over 200 bps on January 1, to just under 5%, a rout for all short-term GGB holders. We are anxiously awaiting RBS' rebuttal.

Five days ago a great white hope appeared for the great bankrupt Golden State (Baa1/A-), in the form of $2 billion in GO bonds, which were supposed to be promptly syndicated via underwriters JPMorgan and Morgan Stanley. This would have been the first bond sale for California since November: a critical milestone as the state creeps ever closer to a full-on default. Unfortunately, the creeping just turned into a casual jog after Jane Wells just tweeted that California has cancelled its bond sale "after legislature fails to approve cash management flexibility bill [the] Treasurer said he needed to attract investors." And seriously, did California think it would succeed where so many other high yield issuers have recently failed?

So as Lockyer contemplates how to best approach DC about a bailout, here are recent California CDS levels. Pick your entry point.

A delegation consisting of EU, ECB and IMF "experts" came to Greece, saw and said "more cuts." Greece, in turn, is doing all it can to soft circle enough support to come to market with a €3-5 billion 10 year bond issue, and has no option but to oblige. The troubled PIIGS member has so far proposed a 5.5% maximum cut in gross salaries to civil servants via entitlement cuts, while the EU is now suggesting an average 7% cut. How this will be accepted by Greece's already striking unions, whose protesters earlier barricaded and shut down the primary building of the Athens Stock Exchange, is unknown but will hardly inspire enthusiasm for wage cutting programs.

As we head into a new week, one of the bigger development expected out of Europe will be "imminent" launch of a €5 billion Greek bond issue, to prefund some of the nearly €20 billion in maturities expected over the next 3 months. However, bulls who expect this "good news" to force short covering may have to put the champagne on ice. Dow Jones previously quoted the former Public Debt Management Agency head Spiros Papanikolaou (who was replaced by former Goldman operative Petros Christodoulou), "There will be another syndication, most likely 10 years. We will go for EUR3 billion to EUR5 billion and depending on the market reaction it could be more, although a 10-year bond is a bit more difficult" to make their case that the new auction is imminent. Yet it is this very same Papanikolaou, who when quoted by Debtwire, pours cold water all over the bulls plans: "Reports about us imminent issuing a ten-year bond auction are totally inaccurate - there is no truth in it at all." And so the great Greek disinformation sopa opera continues.