Bond

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?

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