Bond

And just what HY investors did not want to hear after the Fed shocker: Lipper FMI just reported that High Yield bond funds saw $915.77 million in outflows for the week ended February 17, while bank loan mutual funds saw $160.9 million in inflows. Keep in mind last week was one of the largest outflows in HY in recent history at just under $1 billion. The high beta dumpage is officially on.

The chart left is not indicative of the widening in the sovereign credit of some backwater PIIGS country. It shows the rather substantial move higher in 10 year British Gilt yields over the past week. Are the bond vigilantes slowly but surely (and as very much expected) moving from the periphery, where all the low hanging fruit has been picked, to the core, where the acceleration is only just starting? To be sure, the Gilts are easy targets: with QE unaninmously voted out, and increasing budget deficit, there is little to like.

Spain's 15 year €5 billion 4.65% offering has priced at 99.831, as expected 85 bps over midswaps. The issue is rated Aaa/AA+.

The latest data released by PIMCO's Total Return Fund indicates that the firm's flagship fund added another $8 billion in AUM, which at January 31 stood at $210 billion. This is a $74 billion increase in AUM compared to January 2009. More importantly, the composition of TRF demonstrated that the recent trend away from MBS and Treasuries and into cash and non-USD denominated foreign bonds persists. Gross has now booked $88 billion in profits in MBS since QE started, which brings his MBS holdings to an all time low of $31 billion. All the extra cash has gone into foreign non-US denom bond holdings, which hit a new high of $38 billion, presumably mostly in Bunds, Brazilian and Russian holdings, and, well, cash, which at $19 billion hit the highest level since June 2008.

Even as AMG data was strangely missing late last night according to Prospect News' High Yield Daily, EPFR Global of Cambridge, Massachusetts, which uses a different methodology from AMG (i.e. a working one), indicated a major $1 billion outflow in high yield bond funds. This follows a $335 million inflow and a $137 million outflow in the past two weeks. Subsequently, Dow Jones confirmed the EPFR data, indicating that Lipper FMI recorded $984 million of outflows for the week ending Wednesday. As HY fund flow data is critical when pitching refi deals to junk companies, this key inflection point will likely stall not only the HY new issuance market, but will lead to substantial drops in secondary market prices for junk bonds.

With the ever increasing, and rightfully so, interest on European gross and net bond issuance, we present BofA's latest calendar breakdown of weekly and monthly Bond and Bill redemptions, coupon payments and gross issuance for the key European countries. Using this data, one can determine the net financing needs by country by month, to determine when a supply squeeze is likely to occur. As can be seen, there is a cash crunch for the Eurozone in the Feb-April period as €324 billion in near-term Bills have to be rolled over, while for Bonds the redemption peak hits in Q3, when €176 billion in Bonds have to be redeemed, while coupon payments peak at the same time. Focusing on rollover risk indicates that while Spain, whose 21% of debt rollover concern had been discussed previously, is at risk, Italy is just as much in jeopardy, with 20% of debt requiring to roll in 2010. Another potential flashpoint is the country of Austria, which is only second to Portugal (77.1%) in the amount of debt held by foreigners, at 76.3%.

Portugal has managed to price the much anticipated €3 billion 10 Year bond.

Terms:

• Price: 99.841
• Yield: 4.823%
• Coupon 4.80%
• 140 bps over Swaps
• 163.7 bps over 10 Year Bund
• Ratings Aa2/A+ (ha ha ha ha)

This week showed just how jittery the IPO sentiment was, with so many IPOs pulled on "market conditions" even including perpetual cash cows such as porn sites. Now the weakness in the market is shifting to bonds. The latest casualty is Brazil's BES Investimento bank which has postponed a $350 million bond on "market conditions." We are not so sure if the reason is with "market conditions" or whether the true reason has to do with BES being a local unit of Portugues bank Banco Espirito Santo S/A. We anticipate any corporate entities that have a relation with an increasing number of European countries will soon become locked out from the capital markets.

The first covered bond deal of 2010 is very simple in its terms and still, alas, a 144A deal. Notice four ratings firms were retained to provide ratings.

The rating actions are based on our view that Berkshire's overall capital adequacy, as well as that of its insurance operations, has weakened to levels no longer consistent with a 'AAA' rating and is not expected to return to extremely strong levels in the near term. Furthermore, we expect that the consolidated liquidity position of BRK will be reduced from extremely strong historical levels as a result of the acquisition. As capital adequacy and liquidity levels have declined, investment risk remains very high in our view, compounding the need for extremely strong capital and liquidity given potential investment volatility. A key concern is that BRK's risk tolerances appear to have increased, yet we believe they remain ill defined while the organization increases in complexity. Generally, we believe Berkshire has a high risk tolerance for capital volatility and investment risk. We do not believe that the company's overall risk management framework has evolved atthe same pace as the organization's complexity and that enterprise risk management practices remain in silos within each investment. - S&P

Today's Geithner drubbing comes courtesy of Sen. Paul Ryan, who in a brief 3 minutes presentation indicates why the proposed budget is not only a joke (the fact that he compares it to a box of cigarettes in light of Geithner's associated disclaimer speaks words for the future health of this country. Only only wonders if it is Ben Bernanke or Goldman Sachs who has assumed the role of Surgeon General), but why the bond vigilantes are just waiting in the corridors to see the Fed and PD's control over the bond market slip before they bring the house down.

January is over, and while the stock market closed at its YTD lows, some corporate bond segments are still on fire. Below we present a complete heatmap for January 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 Dec 31, 2009, red is lower, blue is higher).

A Greek bailout is rapidly becoming an extreme likelihood. The implication is that coupled with the newly emerging austerity measures in Portugal, Europe, but mostly Germany, will run out of options very quickly. On one hand Trichet and Merkel have stuck themselves in a corner with all the recent anti-moral hazard talk (and the question of whether Europe's strapped public sources can accumulate enough bailout capital in time is still open), and on the other, as Lehman so well demonstrated, a colossal event such as a eurozone member defaulting, would likely have the exact same unpredictable domino consequences that everyone has long been warning about. The silver lining - an imminent drop in the euro, and a boost to European exports. Perhaps this is the agenda all along - Greece will be the sacrificial lamb which will satisfy the bloodthirst of French and German unions, and prevent political landslides in all of Western Europe. And the kicker - they can't tell Bernanke and the U.S. they did not go along with the G-20 plan of keeping the euro artificially high: after all this will be spun as an "exogenous" event...Ironically, the bitter medicine for the rescue of both Spain, Portugal and the other PIIGS may just the transformation of PIIGS to PIIS.

Cramer joins the alternative apocalypse crowed, which in itself is neither surprising nor amusing. However, on the amusing front, we are not sure if we are more entertained by Cramer's comparison of the President with Goldfinger, or the of Goldman Sachs with James Bond. Either way, as the CNBC comedian says: "You CANNOT OWN THESE STOCKS RIGHT NOW" referring to Citi among others. It may very well be time to load up on Citi.

An extended analysis of TIC, FMS, DTS and TreasuryDirect data confirms that while Indirect bidders (aka Foreign Investors) continue to bid up US Government securities, their interest in the short end of the curve has not only declined, but accelerated redemptions have left Indirects with a heavily weighted long bond exposure. This raises the following questions: are inflation expectations once again vastly premature, who keeps buying the short-end at record low yields, and what kind of event will be responsible for the unwind of the groupthink idea of the day: the curve steepener?