Bond

On Friday, when we discussed that the EFSF could potentially be expanded to a ridiculous E3.5 trillion, we made the following observation in advance of the prediction that Germany would eventually throw up all over the creeping euro bailout proposal, we said:  "In the meantime, short Bunds (or to borrow a Gartmanism, go long gold in Bund terms) ahead of the market's realization that peak risk transfer from the periphery to the core is now in process." Well, the first eurobond prints are in (we already know where gold is trading), and the losers (and winners) are...

The newsflow just keeps getting worse. Via Dow Jones we have learned that Spain, not Italy, has decided to pull its August 18 auction and will instead launch its 5 year auction on September 1. Once again, Zero Hedge being just a little prescient with our 7 am commentary that we "look for Spain to follow Italy in a self-imposed bond market exile." And in far worse news, we now get a schism within the European banking authority itself after Bloomberg reported that the Bundesbank's Weidmann is said to be opposed the resumption of ECB bond buying, at least two bouts of which already took place earlier, most likely in Italian and Portuguese bonds. "Weidmann was not the only Governing Council member against the move, according to an official speaking on condition of anonymity because the ECB policy meeting is not public. Bundesbank spokeswoman declined to comment." The last thing that that the market needs to see now is uncertainty. That the market will see idiocy is a given, but at least keep the idiocy constant. That someone may be a voice of reason only sends shudders of terror through the spine of billions of vacuum tubes around the world which have no idea how to predict the future at this point.

The collapse in the global Ponzi scheme is intensifying. Liffe down next, even as the FTSE MIB has reopened, only to plummet to 5% down for the day with Unicredit and Intesa halted yet again. We expect Italy may not reopen tomorrow.

And the news just gets uber-surreal. According to a Reuters report, the Italian Treasury has a "larger cash pile than generally perceived according to sources." As a reminder this is precisely the excuse that Italy used when it scrambled to cancel medium and long-term auctions for late August as was previously noted. Which can only mean one thing: in order to prevent more ongoing routs, Italy will likely now withdraw from all bond auctions for the "foreseeable future" in order to not give the market a chance to do some real price discovery. Sure enough, the subsequent Reuters headline says that the "Italian Treasury's cash pile is enough to last most of 2011." Odd that we predicted this, and the next steps, just this morning, when we said: "look for Spain to follow Italy in a self-imposed bond market exile." Translation: while Greece, Portugal and Ireland are unable to access capital markets, Italy, as we predicted, has just self-imposed a capital markets exile likely until the end of the year.

When it comes to its opinion on the shape of the bailout, Goldman is a force to be reckoned with (as in every other endeavor, no matter how self-serving the outcome ultimately is): after all it was Goldman which first proposed expanding the EFSF and using it as a "bad bank" SPV which has the extra benefit of being off the balance sheet, and can issue more debt than virtually any financial institution in the world (see EFSF - Too Small? Too Big? Or Just Wrong?). Which is why when Goldman discusses next steps, you can be positive, this is precisely what will end up happening, and that Goldman is already well positioned to profit from whatever policy recommendations it has imposed. So without further ado, here is Dirk Schumacher's latest outlook on how to perpetuate the European status quo.

Unlike the past last auctions in the current week, in which the 2 and 5 year both priced far weaker than expected, and saw a surge in Direct bidders absorb the absence of foreign demand, today's 7 Year auction was largely unmemorable. Granted, it did price with a 1.5 tail, coming in at a high yield of 2.28%, after with the When Issued trading at 2.265% second into the close, indicative of last minute weakness, but the other metrics were largely in line. The Bid To Cover came at 2.63, same as last month's, although well below the LTM average of 2.84%. The internals were stronger with Directs not surging as many has expected, and taking down just 9.26% of the auction, meaning Primary Dealers had to consume 51.2% of the auction. That left foreign bidders recycling their trade surplus to take on about 39.55% of the auction, better than last month's 32.17% but worse than the 12 month average of 43.33%. As noted: rather uneventful and on the weak side. What is more disturbing is that absent a debt ceiling hike, this may well be the last bond auction for a long, long time. And without more auctions, what will Bernanke monetize?

Citing the most hilarious explanation we have ever heard for not daring to approach the capital markets, Dow Jones reports that following a comparable announcement from Austria earlier, none other than clutch euro Domino Italy, whose bond yields surged by about 40 bps today, has decided to take a sabbatical from accessing capital markets, and will not issue medium and long-term bonds in August. Of course, the real reason is that the spreads are prohibitively high but that's a story for another reason. The problem for Italy, however, is that it will end up burning through a lot of cash over the next 45 days and then far more will depend on the successful passage of the country's auctions in the following month, when the next scheduled medium term auction is on September 13 (full auction schedule is here). Amusingly, while all of Europe complains that the Greece, Ireland and Portugal have no capital markets access, some of the better of PIIGS make the voluntary decision to avoid price discovery. We fail to see how this can possibly result in anything than another loss of credibility in the eurozone rescue package.

While there is nothing new in the just released Jim Rogers interview with the WSJ, it is always refreshing to hear him tell the truth, which is, of course that "the US has already lost its AAA status. Who cares what Moody's say." As for the response: "The market looks ahead: this is not the first time that the market has dealt with the fact that the US is bankrupt." As for his proclivity to buy long term US debt: "I wouldn't lend money to the US in US dollars for 30 years at 3%, or 4%, or 5% or you name the interest rate.... I shorted it June 10. I am short the US bond market as we speak." Great stuff as usual.

After mysteriously, and briefly, appearing two weeks ago, and then again last week, we are once again experiencing one of those eerie "cross the streams" kind of moments, when both stocks and bonds are sold off (and gold jumps to record highs) on renewed concerns that the ponzi is unwinding and central planning committees around the world are furiously scratching their bald heads for contingency plans (that do not involve a Gulfstream and a crate of sold gold) which do not exist aside from doing the same old even more furiously. Below is how tonight's modest sell off in bonds looks like. In the absence of any additional newsflow (don't laugh, read this) we expect the mean reversion bots and buythedip-o-matics to get us green overnight, totally screwing up Obama's plan to scare the bejeezus out of any of his GOP adversaries on the debt hike issue courtesy of a market plunge. Elsewhere, be on the look out for yet another BOJ intervention should "newsflow" return as Japan’s Finance Minister Yoshihiko Noda says “will take resolute actions when necessary” in currency market. Then again he has been saying that for two weeks straight now, and absolutely nobody is taking the BOJ seriously any longer.

If someone is hell bent on breaking the bond market, they are doing a bang up job.

UPDATE: CARNEY DENIES NYT REPORT: "THERE IS NO DEAL" 30 Year plunging

Just breaking news from the NYT for now. 30 Year surging.

Up, down, up, down. The daily volatility in the 30 year is now openly inducing nausea in the $60 trillion bond market. But at least the Fed is clearly instituting price stability for 98 years running.

While the CDS market for various insolvent European names whose credit default swaps are trading 10 or more points upfront has become more or less nothing but noise, and the only true way to hedge risk exposure, courtesy of ISDA's advance warning that no matter what a CDS will never be triggered, is to sell cash bonds, the market for default risk is quite active for those names which still trade in a reasonable range: such as between 50 bps and 200 bps. And while the Bloomberg chart below demonstrates on an absolute basis the US is due for a two notch downgrade by S&P based on the recently observed spike in US default risk, it is DTCC data that is more troubling. As most revel in the latest nonsensical Group of 6 plan, the bond vigilantes are already quietly setting the trap.

Following last week's blatant secondary bond market intervention ahead of Italy's two auctions which even Willem Buiter predicted would need central bank intervention (ECB, but any would work), we were waiting to see if the ECB would announce an increase in its bond purchasing activity via the SMP for the week the passed. It did not. Which leaves just one culprit to explain the dramatic moves ahead of bond auctions (which naturally set the mood and allowed the primary issuance to proceed smoothly and not bring down the euro). China. And we venture to assume that it was China again who started buying bonds in the secondary market ahead of today's 4:30 am and 5:00 am issuance of €4.5 billion in 12 and 18 month bills and €1.25 billion in Greek 3 month bills, which resulted in the 10 year tightening -7bps to 1550; after it hit 1564bps earlier today, highest since at least 1998, while Italy's 10-yr yield over bunds tightened -22bps to 310bps vs yesterday’s 332bps, the highest since 1996. Yes this was before the auctions on no good news, and happened just as gold hit an all time high of just under $1610. Sure enough, following this sudden spike in buying interest, the auctions priced tremendously, and have resulted in a major shift in market sentiment in the past 3 hours, leading to a surge in Italian financial stocks, a jump in the EUR and thus a spike in futures.

Just because someone is dead set on making Apple the only flight to safety in the world (and Gold of course, but unlike the iPad one can't really eat this particular tradition), around the time (10 minutes ago) Obama threatened he would veto the Republican proposed vote to raise the debt ceiling coupled with a cap on spending and balanced budget amendment to the constitution, the selling off spilled over to Treasurys, which as the chart below demonstrates are broadly lower across the curve, but most emphasized at the 30 Year spot, which as Russ Certo says (see below) is being "dragged to the slaughter house." Alas, judging by bank trading today the 2s30s steepening is completely irrelevant for bank stocks, for the simple reason that i) nobody needs any new mortgages and ii) nobody actually pays their mortgages. This is the second day since last week in which there is coordinated selling in stocks and bonds. Expect much more bond weakness with each day there is no bond deal.