Bond

The latest indication of the exuberance in high yield was today's announcement from oil-tanker owner Teekay. The firm is offering $300 million of debt to finance a tender offer of the firm's 8.875% 2011 senior notes. Nothing has changed from the frothy days of 2007: tender short, provide sweetener, price longer maturity deal, wait out the next crash, repeat. In the meantime, the company's products are used as glorified warehouses to store ever greater amounts of oil for that day when Goldman's $1,000,000/barrel price prediction finally comes through. In the mean time, EIA reported another 3.7 million crude inventory build to 331 million barrels. Of course, massive supply will bring its own demand... Eventually.

Hold on to your hat, the bond vigilantes will be out full force on Friday. And when the bond market goes 'boo', its chill will be felt across all asset classes.

TrimTabs' Charles Biderman discusses the flow of funds, and the interest rate outlook for 2010: nothing too outlandish - the Treasury bubble thesis revisited, as well as the biggest issue of all - the roll (much more on this from Marla soon). Also some observations on the interplay of money markets and alternative funds, extensively discussed here. Also, according to TCW's Chief Global Strategist the treasury bubble will burst in a few months, coupled with a collapse of the dollar. What this means is that rates will surge. What this also means is that once rates surge, equity values will be whacked as the cost of capital will no longer be zero (sorry Zimbabwe Ben, but you are completely wrong - a cost of capital of zero is the number one reason for pretty much all bubbles). So what do futures do? Up, up, up. The stocks-bonds divergence trade is alive, schizophrenic, utterly insane and well.

As we pointed out two weeks ago, PIMCO has been preparing for 2010 by selling out its legacy "safe" MBS and Treasury holdings, and shifting largely to cash. Furthermore, the recent hirings of corporate and distressed asset managers indicates that the traditionally Treasury heavy asset manager is set to become the world's biggest fixed income hedge fund, focusing on IG, high yield and distressed investments. As PIMCO is a critical manager in numerous government bailout programs, we can only hope that the firms' Newport Beach Chinese Walls are better at keeping secrets than the characters in assorted O.C. legacy "reality" shows. The below presentation by PIMCO's Mark Kiesel indicates why PIMCO will soon be one of the primary actors in future official creditor committees in the upcoming wave of corporate bankruptcies (yes, shockingly assets do have to create cashflows for companies to avoid bankruptcy).

Yesterday CCU surprised the bond world by upsizing its $750 million bond offering, which Zero Hedge highlighted previously as an indication of the top-tick exuberance in the bond market, to $2.5 billion. And according to preliminary rumors it may very well have been the top, with Thomson Reuters' IFR service saying that "counsel for certain lenders has delivered a letter asserting that the transaction and the UOP was an event of default under the CCU Credit Agreement." This is not good for CCU, which had hoped it had sufficiently placated dissident bondholders when it dramatically changed the use of proceeds of the upsized transaction.

With no distressed issues left in US markets, here is some bond trader humor of the best kind - guaranteed hot potato money.

The Dubai government will also announce a reorganization law today which will be available to Dubai World's (DW) creditors if they cannot voluntarily agree on restructuring parameters. Again, this may imply that the government would like to limit further cash injections into DW and Nakheel (beyond the $10bn just announced). - JP Morgan

From the trader grapevine:

Talk out of Dubai that Nakheel is going to make full payment on their bond due Monday -- unclear if there's anything to it but its going around now. Its coming from Dubai so could just be punters trying to walk up their equity tape, incremental positive though. I would note that the bond has been removed from listing on Bloomberg, what that means, im not sure.

Absolutely no corroboration to this at this point, and is likely total BS

What? Huh? Market Conditions? Have they seen the market today? Credit and equity markets have now completely decoupled.

Trader commentary:

Hearing the [MF Global Ltd "MR"] USD250m SEC registered 10y issue has been pulled due to market conditions. JPM sole books. Co-mgrs: Citi, MF, Wm Blair. Rated Baa2/BBB.

That's not good for the equity bubble chasers. Credit is always right in the end. And if even JPM can't sell an IG bond, the window is now closed, except for the momos chasing every offer higher.

"The New York Fed anticipates that, through the balance of the [Quantitative Easing] program, the trading days on which its own staff conducts the program's purchasing activity will gradually increase relative to those trading days on which Wellington executes the program's purchasing activity." - FRBNY, on taking over trading in MBS Agency products and eliminating any and all trading transparency

According to AMG Data Services the abandonment of moral hazard concerns and the pursuit of risk in every form has resulted in an all time record inflow into taxable bond funds (IG and HY). The January through October total amount of inflows of $315 billion dwarfs the $60 billion for the comparable period in the prior year and is double the prior full-year record of $153 billion from 2007. The High Yield bond subset has also been on fire clocking in at $32 billion YTD versus $2.6 billion in HY outflows during the first 10 months of 2008. At the credit crisis peak, money outflows surged to -$45 billion, however for the past three months have inverted into consistent $40 billion + inflows every month since August.

With most investors' eyes glued to equities and corporate bonds, and to a much greater extent, US Treasurys, many are ignoring the storm clouds gathering over the traditionally much more boring, income oriented municipal bond market. A recent research piece by welling@weeden covers most of the question marks vis-a-vis the muni market, although with proclamations such as "the municipal market will probably repeat the pattern of the sub-prime collapse. Although it is plain to see, the usual experts do not notice. This was true of all of our recent financial bubbles, including subprime mortgages" the paper's message may not be too welcome to the $3 trillion+ muni market. For all readers who enjoyed Sprott's recent outlook on the inevitable US debt repudiation, this is a must read report.

A hundred billion this week, over a trillion next year, and it starts to add up. It appears that what has been phenomenal strength in the UST market for many months now, undoubtedly with the fervent support of the Federal Reserve, seems to be abating. Over the past week the 2s10s charts has moved stepper by about 15 points, proving that Julian Robertson's steepener trade and its Constant Maturity Swap derivatives will likely end up being quite a profitable position. With a record onslaught of new issuance this week alone, and the expiration of POMO activities on Thursday, the supply side of the equation may finally be catching up bond traders.

The Treasury has released the line up of Treasury issuance for next week and it is a stunner: in the week of October 26th alone, the US will issue $116 billion in new Treasury Notes (2,5 and 7 Years), another $30 billion in Bills and $7 billion in TIPS. As pointed out earlier, there is about $150 billion in availability before the Federal debt ceiling is breached ($12.1 trillion). This likely means that Geithner will have to resort to some last minute tricks to make this full upcoming issuance legally permitted.

An anemic day in the markets is punctuated by a large spike in crude prices, which despite near record low refinery utilizations, a draw down in reserves has caused the NYMEX speculators to believe that Goldman will finally be proven right with their "oil at $200 v2.0" call. Another highlight is that even as the DXY approaches the highs for the day (and pushing gold lower), stocks have dislocated from chasing the dollar and instead follow bonds (inversely) intraday. Watch for Google earnings after the close.