Bond

In their last solvent days, the Greeks sure are learning fast from the US - first America makes shorting prohibitive (and where it is still possible, various repo desks tend to force short covering at their whim just as the market is about to crash and burn), and now Greece has proceeded to make shorting of Greek bonds impossible. After realizing that its CDS scapegoating campaign was the most miserable and idiotic plan ever conceived, the lunatics who have taken over the Greek insane asylum have now decided to make shorting of GGBs virtually impossible. This is ostensibly the last step before the total collapse as the liquidity that will be removed will make swings in GGB so big it will make the holders of options in FNM, FRE, C and AIG green with envy. The mechanism by which Greece seeks to accelerate it own demise, is by introducing daily repurchase auctions to cover short positions, according to Reuters. Next stop: selling of any Greek (and soon US) security becomes treason and is punishable by death.

Life for Greek administrators can not be much fun these days - anywhere they look they just see more bad news. The latest comes from (appropriately named if you are Greek) S&P analyst Marko Mrsnik who told Reuters that "if the high borrowing cost persists and the consequent deviation from the consolidation path is not addressed, this would in our opinion, delay the reversal of the government debt trajectory and could lead to lower ratings." Nothing yet from Moody's - should Greece and the linked NBG be downgraded even one more notch by Moody's then all sorts of colletaral trigger horrors will be triggered and the liquidity crisis will reach a whole new level of pain.

In order to manipulate bond fund NAVs, two employees "actively screened and manipulated dealer quotes", "fraudulently published NAVs", made "price adjustments" that "were arbitrary and did not reflect fair value." The list keeps going. "This scheme had two architects - a portfolio manager responsible for lies to investors about the true value of the assets in his funds, and a head of fund accounting who turned a blind eye to the fund's bogus valuation process," - Robert Khuzami, Director of the SEC's Division of Enforcement. Sharp Mary barked today. FINRA & the SEC bit.

According to Bankingnews.gr, yesterday's disclosure that Greece would attempt to raise money by targeting US bond investors is now being refuted, and that this will likely "not happen." With record wides across the bond complex, it is not difficult to see why. In the meantime the entire high beta euro sovereign market is melting down. We are stunned US stocks are not up on this latest piece of horrible news: the market has proven quiet resilient in climbing the wall of sovereign bankruptcy in recent months. And now for some comic relief: after alienating Germans in perpetuity, Greece is now targeting the US, and the IMF and specifically its main backer - the US. I guess if you have to go down in flames, might as well try to burn all those who are trying to help you, if only you would cut your profligate ways... Which simple requirement, as was already disclosed, is out of the question. Bankingnews.gr is blaming the plunge in 10 Year GGB on American selling. We are not sure if a "Short Party" is the same as a "Pants Party." We don't want to find out.

In one of the most erudite, intelligent, and insightful conversations on the Bond bull/bear debate, David Rosenberg and Jim Grant go all out at each other, trading blows in this "Great Debate" which is a must see by all. As we pointed out yesterday, Grant is very bearish on bonds, and in a self-made prospectus has decided to downgrade the US, since the rating agencies, which have long been thoroughly incompetent, corrupt and afraid to disturb the status quo, will not do so until it is too late. Jim's point is simple: you can't resolve massive debt with more debt, and says Treasuries, which he calls "certificates of confiscation" are a surefire way to lose one's money. He points to the record supply of US Treasuries, makes fun of the SEC (who doesn't), and in a stunning move, cautions the Fed Chairman, whose ongoing dollar debasement, was once considered treason by the US. His conclusion: "watch your back, Ben Bernanke. Cycles turn" could not have come at a more opportune time. As a contrarian, Rosenberg discusses the McKinsey report looking at sovereign debt, and the Reinhart and Rogoff studies on debt default and highlights that there is a major disconnect between theoretical applications of sovereign default models and practice: in essence the US is still deleveraging as private debt is decreasing and public debt is surging but to a slower degree. In essence, David claims, the second largest monthly debt issuance in March of $333 billion is merely a side effect of ongoing deleveraging, which is a leading and/or coincident indicator of deflation: an environment in which the long bond thrives (Japan is a good reference point).

This is the skinny on the EU's Greek rescue package. The (empirical) truth, the whole truth, and nothing but the whole (empirical) truth! Moral hazard, be damned...

“Tremors”. A good way to describe the psyche of some investors right now is to imagine being a resident of San Francisco or Los Angeles. Everyone is extremely jittery about any sign of a tremor coming from the big fault lines; but as long as nothing happens, life goes on and things improve at a normal pace. In the case of the U.S., there are noticeable improvements which may be self-reinforcing: production, consumption (retail sales, vehicles), profits, inventories, delinquencies, confidence and possibly even employment. Even California tax collections appear to have bottomed. Equity and credit markets reflect these improvements, with YTD gains on target for our 2010 forecasts. But these improvements all lie close to the San Andreas fault lines of U.S. Treasury funding needs, Chinese demand for Treasuries, the end of Federal Reserve purchases, crowding out of private sector demand, rumors of a Moody’s downgrade of the United States, etc, etc. Rates generally rise at the end of a recession, so there’s nothing new in that. But there’s a point at which very high long term rates could derail the expansion. Let’s examine where the greatest concerns are coming from.

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.