Bond

Ever more investors are fleeing from not just the 30 year Treasury but the 10 year as well. Money is rapidly congregating in the whatever yields the sub 10 year space is providing. The fact thatthe upcoming QE 2.0 liquidity and housing stimulus does not contemplate UST purchases is definitely not helping.

Whether or not the rapid move in curve steepening is driven by a flight from long-dated bonds (and yesterday someone very demonstratively puked on the 30 year, both before and especially after the auction), or inflation is starting to finally be a concern for the bond community (unlikely, as it would be a first: everyprevious time equity and credit have disagreed about inflation, it was always credit which was proven right), the 2s10s has steepened by a whopping 14 bps in less than 24 hours. The flipside: more cash for the banks. Is it enough? Or, more importantly, will it be enough 2 years from now when the bank CRE whole loan holdings start rolling (hopefully). At least Bernanke has a head start on the $3.5 trillion problem which is contained.

"If you reduce the increasingly difficult situation facing the largest banks down to its essence, the problem is politicians picking winners and losers. If we don't have losers in our economic life, then there are no winners either. If we don't resolve troubled banks, then all of our banks will be bad, as the century-old Whithers quote above suggests. And the fact that Washington will not let large, mediocre institutions such as BAC fail means that our entire financial system is getting sicker, not recovering as the politicians ask you to believe. The different financial and operational situations facing BAC and other members of the large bank peer group illustrate the point." - Chris Whalen

In its first bond auction since announcing its budget deficit was set to double in 2010 (talking a massive $20 billion here, nothing as puny as $9 trillion over the next 10 years), the Polish government sold only half of the 2 billion of the 5.75% bonds due 2011 it was hoping to offload to investors to plug the hole. It appears, unlike Tim Geithner, Polish Finance Minister Jacek Rostowski does not have Wen Jiabao on speed dial. Then again, after they have taken over America, who knows where Chinese interests will look next: that Bison grass vodka sure is a strategic asset.

If fear is gone you would expect primary bond dealers to reduce considerably the current holdings of bonds. However that it is not the case and hoarding in treasuries continue. The latest uptick shows a net long position at over $16 billion. A very rare and unusual behavior from bond dealers. We look for long term treasury prices to go unusually higher.

The capital rotation into bonds has started in earnest. In the meantime, a couple of robots are still trying to convince each other the equity bubble will be sustained in perpetuity by the Fed. SkyNet may soon be caught with its pants down.

The selloff across the bond curve picks up, with the 10 Year about to go red for the day, even as equities have fooled the T-800 army to bid stocks up amongst each other.

Treasury has a load of paper for sale in August. The market is not set up for the big supply. Could we have another test of the 4% 10 year?

The flip flop between equity and credit accelerates. Just as the administration managed to lower mortgage rates enough to get a moderate pick up in refi applications, bonds are starting to get out of control.

The bond ski jumpers are back.

“The
bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,” Facciponti said. “The copy in Germany is still out there, and we at this time do not know who else has access to it.”

The prosecutor added, “Once it is out there, anybody will be able to use this, and their market share will be adversely affected.”

The proprietary code lets the firm do “sophisticated,
high-speed and high-volume trades on various stock and commodities
markets,” prosecutors said in court papers. The trades generate “many
millions of dollars” each year.

Market tests are useful as they best indicate just what is the real value of hundreds of billions of distressed securities stripped away from any unwarranted optimism and green shoot propaganda. Today's Visteon CDS Auction was just one such test. And if there was a way to grade the test, it would be an emphatic F: not so much for bankrupt Visteon which is already in the morgue, but for other comparable auto suppliers whose bonds and loans recently have seen overambitious PMs buying their debt as if every single credit instrument would be rolled into Taxpayer Capital LLC's Worthless Assets Fund.

No, not with regard to who can put more money into struggling Hell's Angels' favorite company Harley Davidson, or who can launch another failed bond wraparound insurance company... No, we are talking Becky Quick of course, who somehow has a knack for attracting males 2-4 times her own age.

Market tests are useful as they best indicate just what is the real value of hundreds of billions of distressed securities stripped away from any unwarranted optimism and green shoot propaganda. Today's Visteon CDS Auction was just one such test.

Market tests are useful as they best indicate just what is the real value of hundreds of billions of distressed securities stripped away from any unwarranted optimism and green shoot propaganda. Today's Visteon CDS Auction was just one such test.