Bond

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.

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