High Yield

• $40 Billion in 5 Year Bonds close at 2.13% High Yield (15.05% allotted at high), compared to 2.54% previously, 2.46% average in last year, 2 bp tail from 2.11% WI at 1:00 PM
• Bid To Cover comes at 2.71, 2.75 previously, 2.58 average
• Direct bidders take down at new record of 15.0%, compared to 14.3% previously, 8.1% average
• Indirect bidders take down 40.6%, comapred to 48.9% previously, 48.6% average
• Primary Dealer Hit Ratio of 24.3%, compared to 20.3% previously, 24.6% average

• $42 Billion 2 Years close at 0.769% high yield (91.01% allotted), 0.762% expected, 1.024% previous, 0.989% one year average
• Bid-To-Cover comes in at2.93x, lowest since December 2009; prior came in at 3.03x, 3.08 one year average; with stock markets collapsing, no more need for PDs to overbid
• Indirect Bidders: 36.22%, 31.04% previous, 43.23% one year average
• Direct Bidders: 15.18%, 21.41% previous, 11.88% one year average
• Primary Dealer take down 23.06%

While some may think the carnage in stocks is bad, it is really a joke compared to the recent bloodbath in High Yield land, where (leveraged) funds are getting blown out and forced to liquidate high-beta (read: soon to be bankrupt unless they did a covenant lite refi) names en masse. Here is a good summary of the bloodbath happening beneath the surface courtesy of LoanConnector: "With the turmoil in Europe wreaking havoc on the high yield bond market, the week of May 17 saw the second largest spread widening of 2010. Spreads widened 69bp for the week and 33bp on Thursday alone."

After the event(s) of last week, risk is off, at least as indicated by capital flows. We demonstrated earlier how domestic equity funds saw a massive outflow even before the May 6th crash. Now, courtesy of Lipper/AMG we discover that the panic gripping high beta assets, specifically High Yield bonds, since the crash was the third biggest in recorded history (going back to 1992). The $1.7 billion in HY mutual outflows is the biggest flight to safety (or in this case money markets) since May 2004.

A chart comparing the relative performance of the S&P and Investment Grade (inverted spread, on the run) demonstrates that once again the equity algos have jumped the shark on the post crash rebound. While investment grade credit is only at mid-February levels, equities are attempting to retrace the entire loss from 2010 highs and are now at early April levels. As always, choose equity over credit, which is a market at least double the size of stocks, at your own risk. On the other hand, a short SPX, short IG risk convergence trade would seem a relative safe bet to pick a few bps. Of course, that's what everyone said about selling the basis trade in late 2007.

The $44 Billion 2 Year auction closed at 1.024% on a Bid To Cover of 3.03. But not thanks to foreign bidders: Indirect bidders were the lowest in a year, coming it a mere 31.04%, with a lower number record only in April 2009 when it was 28.71%. The slack was picked up by the so called Fed shadow ops/China London trading desk, with the Direct Bidders taking down a whopping 21.41%: the highest by far for a 2010 auction, and the second lowest in history with just the 26.14% in October higher.

For every question you may have on the outlook for the industrial side of the economy, especially if you are a HY analyst, here is the answer (at least from a groupthink perspective) in 167 pages.

Strong demand for the just closed $40 billion 3 Year Bond auction:

• Yields 1.776% vs expected 1.766%
• Bid To Cover strong 3.1 versus 3.13 previous and 3.05 average
• Indirect Takedown of 52.20% vs Average 54.13 (previous 52.01)
• Indirect Hit Ratio: 69.3%
• Direct Take Down: 10.8%, 10.3% previous, all time high of 23.4% in January 2010

The great risk transfer into Other People's Money continues as evidenced by an absolute record amount of high yield issuance in March: so far was have seen $29.7 billion in bonds price and with over ten more deals announced for this week to take advantage of the euphoria gripping the three stocks (C, BofA, QQQQ) that now represent the entire stock market, we are sure to surpass $32 billion. Banks are scrambling to underwrite as many bonds as the buyside will accept knowing full well the new issue window will likely close soon (or at such time as the American middle class says enough to the great wealth transfer experiment conducted by the Federal Reserve). The last time we saw such irrational exuberance in bonds was in the months and days leading to the onset of the second great depression (oh yes, consumer confidence at 52.5, which about 30 below levels indicative of a healthy economy, came in better than expected).

If you were one of the unlucky few caught exposing Barclays' shenanigans over the past year while acquiring Lehman at subfiresale prices (and being sued for that now), you probably were not invited to the annual Lehman Brothers (yes, that's how it will always be know, and always with Brad Rogoff leading the charge) HY conference, this year held at the Phoenician in Scottsdale, AZ. On the other hand, even if you were invited, but like quite a few people, spent all your time in Jenna Jameson's Babe's Cabaret, and need to send your boss a summary of all you"learned" you must be about as pleased as Tim Geithner at a Tax Cheats Anonymous meeting. Fear not - here is the full presentation deck, chock full of cool stuff stuff, pretty graphs and bullish, bullisher, bullishest ideas. So buy all the worst junk before the market crashes again and Lehman still has gobs of crap paper on their books. Cause this time the Repo 105 reacharound just ain't gonna cut it.

$40 billion 3 Year closed at 1.437% high yield, 15.66% allotted at high; 1.403% median; 1.34% low

WI last traded at 1.447% at 1pm

Bid To Cover 3.13; previous 2.83, average 2.98

Primary Dealers bid 67.28% of total competitive bids of $124.9 billion

Indirect take down: 51.84% versus 53.53% average

Indirect hit ratio: 75.67%

Lipper FMI has reported that bank loan mutual funds saw $179 million in inflows, while HY funds increased their capital by $314 million in the week ended March 3. This compares to inflows of $228 million and $470 million in the prior week, and HY outflows of $1 billion for two weeks running in the weeks prior to this. If HY bond and loan mutual fund flows track the market, one would have expected a more spirited appearance from HY investors this past week.

• Yields 0.895% vs. Exp. 0.88-0.90
• Bid To Cover 3.33 vs. Avg. 3.21 (Prev. 3.13)
• Indirects 53.60% vs. Avg. 42.45% (Prev. 43.22%)
• Indirect hit ratio 65%
• Allotted at high 14.79%
• Direct take down: 8.2%

And just what HY investors did not want to hear after the Fed shocker: Lipper FMI just reported that High Yield bond funds saw $915.77 million in outflows for the week ended February 17, while bank loan mutual funds saw $160.9 million in inflows. Keep in mind last week was one of the largest outflows in HY in recent history at just under $1 billion. The high beta dumpage is officially on.

Even as AMG data was strangely missing late last night according to Prospect News' High Yield Daily, EPFR Global of Cambridge, Massachusetts, which uses a different methodology from AMG (i.e. a working one), indicated a major $1 billion outflow in high yield bond funds. This follows a $335 million inflow and a $137 million outflow in the past two weeks. Subsequently, Dow Jones confirmed the EPFR data, indicating that Lipper FMI recorded $984 million of outflows for the week ending Wednesday. As HY fund flow data is critical when pitching refi deals to junk companies, this key inflection point will likely stall not only the HY new issuance market, but will lead to substantial drops in secondary market prices for junk bonds.