Across the Curve
The only word to describe today's just concluded, and final for the week, auction of 30 Year paper can only be described with one word: blistering. First, the pricing yield itself, coming at 3.224% a whopping 2.5 bps through the When Issued, was the lowest since May 2013, just before the first Taper tantrum which sent yield surging only to regain all Ultra losses in the next year.
In what was practically a carbon copy of yesterday's 10 Year auction, moments ago the Treasury sold $13 billion in 30 Year paper which priced at 3.369%, the lowest yield since June of 2013 when it hit 3.355, even if it meant a modest 0.9% bps bps tail to the 3.360% When Issued. The internals were both good and bad: bad in that the Bid To Cover came at 2.40, modestly lower than last month's 2.69 but better than the TTM average of 2.38. Good in that the Indirect takedown of 53.25 was the highest since we began keeping records in 2008, and continues the trend seen last month in which Indirects bought more than half of the auction. This strength, however, was offset by a drop in the Direct bid by nearly half from last month's 21.8% to 11.1%, leaving a modest 35.7% to the Dealers to promptly flip back to the monetizing Fed.
Perhaps the reason why the just concluded 7 Year auction priced quite sloppy, if not outright ugly, is because it came at a time when virtually nobody was paying attention, or otherwise bidding. Moments ago the Treasury sold $29 billion in 7 Year paper, which priced at 2.152, a notable 1.2 bps tail to the 2.140% When Issued, indicating not all was well with the internals. Sure enough, the Bid to Cover of 2.435 was well below the TTM average of 2.56, and was the lowest since November. Direct Bidders were not too excited with the paper, and as a result took down only 16.66% of the final allottment, the lowest also since November. And with Indirect taking down a tame 40.62%, this mean Dealers were forced to step up and buy 42.72% of the issue - the highest Dealer allocation since, you guessed it, November. Perhaps the only thing the auction had going is that at 2.15%, the closing yield remains decidedly low (having peaked recently at 2.32 in April), if rising modestly from the 2.01% in May which happened to be the lowest since October.
Judging by the surprising reversal in futures overnight, which certainly can not be attributed to the latest data miss out of Europe in the form of the June German IFO Business Climate report (print 109.7, Exp. 110.3, Last 110.4) as it would be naive to assume that centrally-planned markets have finally started to respond as they should to macro data, it appears that algos, with their usual 24 hour delay, have finally discovered Dubai on the map. The same Dubai, which as we showed yesterday had just entered a bear market in a few short weeks after going turbo parabolic in early 2014. It is this Dubai which crashed another 8% just today, as fears that leveraged traders are liquidating positions, have surfaced and are spreading, adversely (because in the new normal this needs to be clarified) to other risk assets, while at the same time pushing gold and silver to breakout highs. Recall that it was Dubai where the global sovereign crisis started in the fall of 2009 - will Dubai also be the place where the first domino of the global credit bubble topples and takes down the best laid plans of central-planners and men?
Where does one begin with the plaudits for the just completed 30 Year auction. Following this week's weak, tailing 3 and 10 Year auctions, there was concern the 30 Year would be a disaster. It was everything but: pricing at 3.444% (virtually unchanged from the 3.44% last month), the final demand stopped through the When Issued of 3.467% by some 2.3 bps - the largest in recent history. And speaking of recent history, the Bid to Cover soared from 2.09 in May to 2.69 today, the highest since February 2013. And then there were the internals: Indirect bidders just couldn't get enough, with the allotment to Indirect bidders exploded to 51.8%, the highest since February 2006 and second highest ever, and since Directs took down an aggressive 21.8%, this means that Dealers we left with a tiny 26.5%: the lowest Primary Dealer allottment in history.
The recent decline in US yields appears to have run its course and given Citi's outlook for a better employment dynamic in the US, they expect yields to trend higher at this point. Citi's FX Technicals group remain of the bias that the normalization of labor markets (and the economy) will lead to a normalization in monetary policy and as a result significantly higher yields in the long run. Might the shock be that the Fed could be grudgingly tightening by late 2014/early 2015 (an equal time line to the 1994-2004 gap would suggest end November 2014) just as it was grudgingly easing by late 2007 despite being quite hawkish earlier that year? However, given the "treacherous market conditions" we suspect Citi's hoped-for normalization won't go quite as smoothly as The Fed hopes.
If one had to use one word to describe today's 30 Year bond auction, it would "atrocious." With the When Issued expecting the 30 Year refunding (CUSIP: RG5) to price at 3.40%, instead we got one of the biggest rails in recent history when the Treasury announced that the high yield required to sell $16 billion in 30 Year paper was a whopping 3.44%. To be sure, this was the lowest 30Y auction yield since June of 2013, however we may be reaching a point when there is simply no issuance demand for new paper. This was perhaps best seen in both the Bid to Cover which tumbled from 2.52 in April to just 2.09, the lowest since August 2011, and the hit rate of the Indirects, who took down 40.4% of the auction, and were hit for 99.7% of the bids tendered - a whopping result. Directs fled as well, taking down just 8.4% of the auction, the lowest since March 2013, leaving Dealers with 51.2% of the auction, the most also since March 2013.
In a word... "mixed" Early ugliness gave way to another ramp job courtesy of USDJPY's 101.50 level holding - which managed to clamber the Dow to unchanged on the week and stabilize the S&P (after it bounced off its 50DMA). But... Nasdaq and Russell just could not get it together until the last few minutes thanks to a VIX slam, JPY ramp and 30Y dump. Yellen's testimony pushed some volatility through markets and perhaps provided the extra pressure on the small caps (after warning of valuations). The term structure steepened modestly with 30Y +1.5bps and the rest of the curve rallying 2-3bps (10Y unch). The USD rallied modestly off 19-month lows. Gold had its worst day in 3 weeks, breaking below 1300 and testing its 100DMA (tick for tick with silver on the day). Oil prices jumped back up to around $101 as Copper slipped back towards $3. And finally, we hesitate to mention it... today's market schizophrenia was enough to trigger a Hindenburg Omen.
VIX-slamming, USDJPY-ramping, BTFDe-escalating muppetry and we end the week near the highs with the S&P and Trannies comfortably green YTD (though notably underperforming gold still). Treasuries were sold hard today (7Y +10bps) as the D word was bandied about by the politicians (while in reality de-escalation was anything but what was happening), but the 5s30s still flattened modestly further. 10Y saw one of its worst days of the year and yields pressed up to their 200DMA. Gold and silver were flat to modestly lower as copper and oil limped higher. FX markets were relatively calm as the USD pushed higher on the week (+0.5%). Stocks closed weak into the close but after 3 days of ramp, it's hardly surprising.
While the sight of Russian flags, pro-Russian troops, and Russian navy ships in Crimea is now a day-to-day thing; this morning brings a new normal for the eastern Ukraine region - long lines at bank ATMs as the bank runs have begun. We noted last night the dreaded inversion of Ukraine's yield curve, the greater-than-50% yields on 3-month Ukraine government debt, and the pressures on local bank debt maturities as the ability to garner dollars cost-effectively was becoming a problem but on the heels of concerns by the head of the central bank that moving cash in Crimea was difficult, ATM withdrawal limits have been cut. People in long ATM lines are reported to be concerned because "banks are closing" but it is Deutsche Bank's comments this morning that raised many an eyebrow as they suggest that Ukraine's debt is pricing in a "burden-sharing" haircut for bondholders (which as we have seen in the past - in Cyprus - can quickly ripple up the capital structure and become a depositor haircut).
While the US may be rejoicing its daily stock market all time highs day after day, it may come as a surprise to many that global equity capitalization has hardly performed as impressively compared to its previous records set in mid-2007. In fact, between the last bubble peak, and mid-2013, there has been a $3.86 trillion decline in the value of equities to $53.8 trillion over this six year time period, according to data compiled by Bloomberg. Alas, in a world in which there is no longer even hope for growth without massive debt expansion, there is a cost to keeping global equities stable (and US stocks at record highs): that cost is $30 trillion, or nearly double the GDP of the United States, which is by how much global debt has risen over the same period. Specifically, total global debt has exploded by 40% in just 6 short years from 2007 to 2013, from "only" $70 trillion to over $100 trillion as of mid-2013, according to the BIS' just-released quarterly review.
While victory was declared yesterday, today was a let-down for the exuberant. High beta (NASDAQ and Russell) pushed on but the S&P, Dow, and Trannies slid leaving the NASDAQ YTD best performer (+1%) and the S&P back into the red for 2014. Financials underperformed, Utilities outperformed. Treasuries rallied all day - with the long-end underperforming and a notable flattening across the curve (30Y -2bps on the week, 5Y +2bps). The USD had a quiet day as JPY strengthened modestly (hence the weakness in the S&P) as overnight AUD weakness (poor jobs data) left that carry pair alone in the dark. VIX and credit markets have been notable underperformers relative to stocks in the last 2 days. Commodities were quiet all day with some early downside pressure in the precious metals unwound (leaving then down 0.5% on the week). Of course, it wouldn't be the US equity market without the ubiquitous VIX slam attempt to ignite momentum and get the S&P green - it failed for once!
USDJPY's medium-term trend has turned from bullish to bearish. BofAML's Macneil Curry warns that the break of the old May highs suggest weakness should extend further with the 200-day moving avarege at 99.71 as a minimum downside target. Given the JPY's weighting in the USD Index basket, this does not have specific bearish USD implications but does have significant effect on equities as the JPY carry trade comes under pressure.
According to Bill Gross the outlook for 2014 is all about inflation, and how it will impact bonds in the 1-5 maturity bucket: "I am amazed at the fascination and emphasis placed on the u-rate during employment Fridays. Bond prices will move (in some cases by points) with a minor up or down change in unemployment relative to expectations, but when it comes to the third little pig of the litter – inflation – no one seems to care. This number – the PCE annualized inflation rate – is released near the 20th of every month but you will not see CNBC or Bloomberg analysts waiting with bated breath for its release. I do. I consider it the critical monthly statistic for analyzing Fed policy in 2014. Why? Bernanke, Yellen and their merry band of Fed governors and regional presidents have told us so. No policy rate hike until both unemployment and inflation thresholds have been breached and even then “they’re not thresholds,” they’re forks in the road that may or may not lead in a different direction. If so, then 1-5 year bonds, combined with credit, volatility, curve rolldown, and a dollop of currency should float a bond investor’s boat in 2014 and avoid breaking the buck in total return space.... If PCE inflation stays below 2.0% and inflationary expectations don’t rise appreciably above 2.5%, then a 3-4% total return for 2014 is realistic. "
While shortened Christmas Eve trading is traditionally the lowest volume day of the year, based on recent trends it may be difficult for today's action to stand out from the landscape thanks to an ongoing volume collapse, which however should make the even more traditional low-volume melt up that much easier. Sure enough, futures are modestly higher driven by their favorite signal, the EURJPY. Not surprisingly there has been particularly light newsflow with market closures in Germany, Italy and Switzerland in addition to early market closures for UK, France, Netherlands and Spain. Those markets that are open are trading in positive territory with the FTSE 100 being supported by BSkyB following an upbeat pre-market report for the company and their customer base, whilst the IBEX 35 is being supported by the financial sector. Overnight in China there was news of an injection of CNY 29bln via a 7-day reverse repo, although market commentators have said that this is more of a gesture than any meaningful intervention given the size of the country's banking market. Fixed income markets are particularly light with there being no trade in the bund future given the Eurex closure, with other trading products relatively flat given the lack of newsflow. However, the short-sterling curve has bear-steepened and thus continuing the trend seen since the end of last week as a result of both UK unemployment and UK GDP coming in better than expected.