High Yield

If yesterday's 2 Year auction was largely blah, today's issuance of $15 billion in 5 year bonds can only be described as blistering. While the high yield of 1.53% was strong enough to stop through the 1.538% When Issued, and the lowest since November's 1.34%, it was the Bid to Cover that showed just how much demand there was for paper, as 2.98 dollars in tendered bids were waiting for every dollar of allocation: this was the highest Bid to Cover since September 2012 and well above the 2.62 TTM average. This outlier print snapped the recent trend of declining BTCs and showed that when it comes to Bill Gross once favorite spot on the curve, there is no lack of demand, especially from foreigners, who took down 50.7% of the allotment, the highest since July and solidly above the 44.5% average. On the other hand, Directs who lately are hardly the best friends of the Dealer community, took down only 9.2%, the lowest also since July, leaving 40.2% for the dealers.

For the second night in a row, China, and specifically its currency rate which saw the Yuan weaken once more, preoccupied investors - and certainly those who had bet on endless strenghtening of the Chinese currency - however this time it appeared more "priced in, and after trading as low as 2000, the SHCOMP managed to close modestly green, which however is more than can be said about the Nikkei which ended the session down 0.5%. Still, the USDJPY was firmly supported by the 102.00 "fundamental" fair value barrier and as a result equity futures, which had to reallign from tracking the AUDUSD to the old faithful Yen carry, have been propped up once more and are set to open at all time highs. If equities fail to breach the record barrier for the third time in a row and a selloff ensues after the open in deja vu trading, it will be time to watch out below if only purely for technical reasons.

Sometimes you just have to sit back, look at some charts, and say WTF...

The default cycle that should have occurred, given historical patterns of issuance cycles, has morphed (thanks to the Fed) into a refinancing cycle; but while DoubleLine's Jeff Gundlach suggests that fundamentals are supportive, "the valuation of junk bonds as a category is at its all-time overvalued versus long-time treasury bonds." So despite Yellen exclaiming that she sees no bubbles, one of the world's largest bond fund managers has never seen corporate bonds (investment grade and high yield) more expensive. Gundlach goes on to note he has sold some Apple (but believes it will remain range-bound), is baffled by the valuation of Chipotle, and sees 10Y Treasury yields dropping to 2.5% or lower.

Last week it was the largest equity outflow in over two years. This week, following the Monday drubbing which had the temerity to push the S&P to an "unprecedented" 5% from its all time highs, the timid retail investor said enough, and ran for the hills resulting in the largest equity outflow. Ever.

There are two major concerns that everyone should be concerned about that we see taking this sell-off further and faster than anyone else expects...

There is one major problem when the entire market is a rigged casino (by both the Fed and HFTs), favoring degenerate gamblers over traditional investors: at the first whiff of trouble everyone bails. Or as BofA politely puts it, "Typically flows follow returns and this week was no exception." In the past week, trouble whiffed, and the degenerate gamblers, loaded up to the gills with record margin debt hightailed it out of the casino, leading to the largest weekly equity fund outflow in over two years! Add some record leverage to the equity withdrawal, continued EM turbulence, ongoing Japanese deflation exports, oh and of course the ongoing Fed taper which has been solely responsible for all S&P gains since 666, and suddenly you have all the ingredients for a broad market crash.

"I happen to think that 2014 is a VERY different year than 2013 from a variety of viewpoints.  First, there appears to be a dispersion of opinion about markets, valuations, policy frameworks and more.  This is a healthy departure from YEARS of artificiality.  Artificiality in valuations, artificiality in market and policy mechanics and essentially artificiality in EVERY financial, and real, relationship on the planet based on central bank(s) balance sheet expansion and other measures intended to be a stop-gap resolution to  tightening financial conditions, adverse expectations of economic activity, and the great rollover" - Russ Certo, Brean Capital

If yesterday's 10 Year auction was a little on the weak side, stopping through the When Issued by 0.2 bps, there were no such problems for today's last of the week 29-year 10-month reopening auction, which just priced $13 billion of the previously issued CUSIP RD2, at a high yield of 3.899%, through the 3.906% WI. The strength was not only in the pricing, but the Bid to Cover as well, which came at 2.57, above last month's 2.35, and also above the 12 month trailing average of 2.45. Finally, the internals were strong as well, with Dealers taking down 38.1%, the lowest since October's 35.5%, leaving 44.4% for Indirects, above the 38.6% average, if a tad below last month's 46.0%, and Directs holding 17.5% of the final allotment, up from 12.5%, and above the 15.9% TTM average. As a result of the strong auction, the kneejerk reaction in the Ultra was a 10 tick higher move from 137.07 to 137.17, and also helped push the entire jittery complex higher.

USDJPY remains in charge of US equities this morning as hope sprang eternal for a few moments when the NASDAQ managed to go green for 2014 shortly after the open. However, the weakness in USDJPY began around Draghi's speech and stocks in the US inevitably caught down to the carry unwinds. Short-dated Treasuries continue to bleed higher in yield and the 5s30s curve is now its flattest in 4 months (and 2s30s 2-month flats) Credit markets have been waving a red flag for a few days and high-yield and investment-grade credit risk is now back at its widest since Dec 20th. VIX is leaking modestly higher as it seems managers prefer to 'sell' than 'hedge' as the realization of the Fed's QE-costs-and-benefits statement sink in.

Back in September, just before the FOMC announcement in which Bernanke shocked everyone by not announcing a Taper, the 3 Year priced in the early part of the month at a yield of 0.913%: the highest since May 2011. After that, following the delay of the taper, yields dipped, but are once again rising higher, and moments ago the $30 billion 3 Year auction priced - in the first post-taper auction - at a high yield of 0.799%, a jump from the December 0.631%, and a tiny tail to the When Issued stopping at 0.797%, but still shy of the September wides.

The first trading session of previous years has always been a whopper for those betting on central planning and capital flows. In fact, if one adds up the S&P performance on the first trading day of each year going back to 2009 (i.e., 1/2/13: + 2.54%, 1/3/12: + 1.55%, 1/3/11: + 1.13%, 1/4/10: + 1.60%, and 1/2/09: + 3.16%), one gets a whopping 10% return just on that one trading session. Which is why the fact that futures are glowing read, if only for the moment, may be disturbing for index investors and all those others who put all their faith, not to mention money, in St. Janet. Today's red open is hardly being helped by the 10 Year which continues to drift lower with the yield now at 3.04%, even as the Spanish 10 Year yield just got a 3 handle as well. At this rate the two streams should cross some time in the next two months. Just what a higher yield in the US vs Spain would imply for fair and efficient markets, we leave up to readers to decide.

A year which showed that central planning works (for the fifth year in a row and probably can continue to "work" at least a little longer - in the USSR it surprised everyone with its longevity before it all came crashing down), is drawing to a close. This is what has happened so far on the last trading session of 2013. As market participants head in to the New Year period, volumes are particularly thin with closures being observed across Europe with only the CAC, IBEX and FTSE 100 trading out of the major European indices, with German, Switzerland, Italy and the Nordic countries are already closed. The FTSE and CAC are both trading in the green with BP leading the way for the FTSE earlier in the session after reports the Co. have asked a federal appeals court to block economic loss payments in its settlement of the Gulf of Mexico oil spill. European stocks rise, with real estate, travel & leisure leading gains. Retail shares underperform as Debenhams slumps following its IMS. A number of major markets will close early today. The euro falls against the dollar. Fixed income market are particularly quiet with the Eurex being shut. Whilst Gilts are seen down this morning following on from yesterday’s short-covering gains.

It's the last Friday of 2013. Here is what happened overnight.

The latest overnight meltup which has pushed the DJIA and S&P to new implied record opens has been driven by, what else, the falling Yen, which after tumbling to fresh new 5 year lows following the release of the BOJ minutes (which said nothing new), has sent both the Nikkei higher by 1%, to post-2008 highs of 16,174, while the S&P, up about 5 points just shy of 1840, and has only three trading days in which it should close the gap to the central banks' price target of 1900 as we first showed in April. In the absence of any actual newsflow (we now live in a world in which both good and bad news are P/E multiple beneficial, just continue keeping an eye on the EURJPY and the USDJPY - these are the only two signals tht matter for the market.