High Yield

• Yields 1.377% vs. Exp. 1.36%
• Bid To Cover 2.83 vs. Avg. 3.01 (Prev. 2.98)
• Indirects 51.2% vs. Avg. 54.12% (Prev. 38.09%)
• Indirect Bid To Cover lower at 1.16
• Allotted at high 26.75%
• Direct take down 10.07%
• Indirect take down 51.18%

Low policy rates don’t impact speculative grade debt so much. Mortality rates for lower-rated debt are much higher than investment-grade debt; the three year mark is where defaults really start to bite. Three years ago (2007), 51% of HY issuance was rated B or below. Mortalities have been accelerated by economic factors, but cumulative default rates will still be high. A buy-and-hold strategy with a broad index of HY debt consistently outperforms the Treasury benchmark. Trading strategies benefit from treasury positioning.

• Yields 1.490% vs. Exp. 1.513%
• Bid To Cover 2.98 vs. Avg. 2.99 (Prev. 2.98)
• Indirects 38% vs. Avg. 59.02% (Prev. 60.9%)
• Indirect Bid To Cover at 1.37
  
• Alloted at high 79.20%
• Direct bid surges from 2.9% in December to 23%

Indirect bid plunges to 38%, from 60.9% in December, 68.5% in November and a 59.02% average. Direct Bidders jump to a record 23% compared to 2.9% in December. This is a very material development in change of the traditional purchasers of govvies.

If the recent $750 million Clear Channel deal was not indication enough that the high yield market is now back to 2007 market top levels, the sudden resurgence of dividend recap deals should be a sufficient and necessary condition that company boards are now willing to throw any debt leverage caution to the wind and extract as much proceeds as possible during the current HY offering megaspree before the window closes with a bang. And with investors no longer even demanding any negative covenants, the rush to relever and cash out existing equity-holders will definitely end in tears. Of course, the Fed is there to backstop each and every balance sheet. If Goldman is too big to fail, bond investors will claims, so is 10x leveraged port-a-potty maker UnitedSiteServices (or so PE sponsor DLJ Merchant Banking would hope). And if there is one entity that is ecstatic with the current HY mania (in addition, of course, to equity sponsors who a year ago were staring bankruptcy in the face and are now extracting hundreds of millions on the back of gullible and potentially semi-retarded "long-onlies"), it is Wall Street banks, which have perfected the art of finding retarded idiot investors (in exchange for a meager 3% fee) who are happy to ignore the whited-out "Use Of Proceeds - dividend payment to existing equity" and throw their LPs' money down said port-a-potty.

• Yields 1.223% vs. Exp. 1.229%
• Bid-To-Cover 2.98 vs. Avg. 2.92 (Prev. 2.62)
• Indirect Bid-to-Cover 1.32
• Indirects 60.9% vs. Avg. 57.70% (Prev. 54.15%)
• Alloted high 50.40%

The base case number one takes the view that high yield default rates are peaking and will start to drop from this level now. The rate of unemployment ranges from 10% to 11.5% with this given scenario. In the base case number two, I am using a composite of both peaks in 1991 and 2002 to suggest that default rates may carry upward one percent more. The resulting effect on unemployment targets will range from 11% to 13.5%. In our final analysis base case number three will use the peak at 13% in default rates established in 1991. Unemployment rates in this scenario show a range of 12.5% and 15% before possibly peaking.

Not a good day for PIMCO as Calpers continues scapegoating for its deplorable performance, and today the California Pension manager decided to trim its exposure to PIMCO. In doing so, Calpers slammed the Newport Beach firm for being too risk averse (watch out Bill, you know what happened to John Mack for being too timid): "While PIMCO managed to return 35.06% [from January to September 2009], PIMCO's aversion to risk resulted in underperforming the benchmark return of 47.45% by 1,238 bp." The result: Calpers is pulling $100 million from PIMCO, however it is not firing the manager altogether and instead will consider "allocating more assets to PIMCO in the future when risk aversion is expected to produce alpha in the high yield market."

• Yields 3.47% vs. Exp. 3.475%
• Bid-To-Cover 2.81 vs. Avg. 2.83 (Prev. 3.01)
• Indirects 47.3% vs. Avg 40.78% (Prev. 47.24%)
• Indirect Bid-To-Cover 1.51
• Alloted high 82.49%
• Directs at 4.5% of Total accepted

• Yield 1.404% vs. Exp. 1.419%
• Bid-to-cover 3.33 vs. Avg. 2.82 (Prev. 2.76)
• Indirects 68.5% vs. Avg. 52.77% (Prev. 48.97%)
• Indirect bid-to-cover: 1.39
• Alloted High 38.42%

• Yields 3.141%% vs. Exp. 3.120%
• Bid-To-Cover 2.65 vs. Avg. 2.65 (Prev. 2.79)
• Indirects 59.3% vs. Avg. 57.17% (Prev. 61.72%)
• Indirect Bid-To-Cover 1.20
• Allotted high 46.79%

• Yields 2.388% vs. Exp. 2.381%
• Bid-To-Cover 2.63 vs. Avg. 2.35 (Prev. 2.4)
• Indirects 54.8% vs. Avg. 48.97% (Prev. 44.72%)
• Indirect Bid-To-Cover 1.29
• Allotted at high 2.81%

• Yields 1.020% vs. Exp. 1.051%
• Bid-To-Cover 3.63 vs. Avg. 2.96 (Prev. 3.23)
• Indirects 44.5% vs. Avg. 50.2% (Prev. 45.18%)
• Indirect Bid-To-Cover 2.1
• Allotted at high 3.21%

• Yields 0.769% vs. Exp. 0.939%
• Bid-To-Cover 3.10 vs. Prev. 1.81
• Indirects 47.8% vs. Prev. 23.73%
• Indirect Bid-To-Cover 1.53x
• Allotted at high 38.26%

The Merrill Lynch High Yield Master II Index, often used when assessing the state of the broad High Yield market, suggests that Junk bonds have returned a whooping 51% year-to-date, thereby outperforming the SPX by a cool 29%. I am notoriously skeptical about indices (reasons include geometric returns versus dollar weighted returns, index inclusion/exclusion problem, changes in share of CCC rated paper, etc). Looking at High Yield mutual fund indices only partly solves such issues as these indices have their own flaws but f.i. Lipper's HY index ytd return was in the low 40's and thereby almost 10 percentage points (so actually 20%) lower than the Master II's.

The place where the real big boys play, high yield cash bonds and CDS in IG, has seen unprecedented activity over the past year. Overall, more than $1 trillion in corporate issues were sold in 2009, although in fairness $192 billion of this amount is courtesy of taxpayer subsidized TLGP sponsored financial issuance (Mr. Blankfein, speaking of transparency, when do you plan on paying back your portion of TLGP debt?). Yet real speculative mania has never been as evident as what has transpired in the junk bond domain: YTD more than $103 billion of BB- and below rater paper has been issued, compared to just $48.8 billion for all of 2008.