Bond

Reader Nick Ricciardi submits a rather controversial view on the future of Japan: "Over the past few weeks there has been a new round of articles and commentaries predicting doom for Japan’s economy. Yet, as usual, Japan’s bond markets have shrugged off these fears. Japan’s capital markets and its macro-economy are replete with confounding puzzles. But they are all rooted in two basic misconceptions that Japanese hold concerning their debt. Moreover they are understandable if analyzed from a perspective of both the public and private sectors. Doing so gives us insight into why Japan’s public debt offers the lowest yields of any nation when its debt/GDP ratio is the highest, why Japan’s corporate credit spreads are so narrow and its yield curve almost flat, why Japan’s bond prices are less volatile than those of other industrialized nations when its economy and stock market is “leveraged” to global growth, and why the yen tends to strengthen when Japan’s economy turns down."

Yesterday we tried (and failed) to make a big deal of the fact that Primary Dealers flipped 53% of the 7 Year Bond just issued two weeks ago (apparently nobody in charge cares or understands what this means, except for Bill Gross of course), so today we will go for an encore, and courtesy of today's $6.69 billion POMO, point out that the Primary Dealers have now managed to flip 50% of the just issued 5 Year Bond CUSIP: 912828QJ2, which was issued on February 23, and which saw $20 billion allocated to Primary Dealers. Well, on the Pomo from March 2, the Fed monetized $4.9 billion, and today this was followed up with another $5.1 billion. The monetization farce is now moving to every single OTR bond, and nobody in congress dares to ask why or how much money the Primary Dealers are making as a result of this travesty. Which is why going forward we may or may not report on bond auctions that have a Primary Dealer component (so all): in essence with the Fed guaranteeing to buy back half of every Primary Dealer take down, it is no longer an auction. Luckily, there is a 35% SOMA limit on how many bonds the Fed can monetize per CUSIP. Oh wait, that was scrapped as part of QE2. It is now a true Vaseline free for all.

Today the government auctioned off a reopening of the 912828PX2 10 Year, which at $21 billion, priced at 3.499%, and a 3.32 Bid To Cover. The auction was decent, pricing inside of expectations of 3.535%, however it was nothing like last month's blowout 10 Year which saw the highest Indirect take down on record at 71.3%. This time around, foreign institutions supposedly bouth 53% of the full amount (at a 74.5% hit rate), with Primary Dealers responsible for 40.5% (a really low 17.7% hit rate). Direct bidders remerged after their complete disappearance last month, and were responsible for 6.5% of the take down. Since the auction process is now a farce, and really no longer matters as it is merely an intermediary step to fund PDs, who promptly flip bonds back to the Fed, we refuse to dig too deep into what if anything today's action means for bond demand. If Bill Gross is correct, it means that USTs are in for a lot of pain in the future.

When the Treasury issued $29 billion in 7 Year bonds (CUSIP: 912828PY0) thirteen days ago, in an auction which we described as "unremarkable", the Primary Dealers took down $13.9 billion of the total issue, or 45.9% of the entire issue. Fast forward to today's POMO, which just concluded, and we learn that the Fed monetized $7.657 billion in bonds maturing between 09/30/2016 -
02/28/2018, or a 3.85 Submitted to Accepted ratio. As usual the internals are what matter. A quick scan shows that PDs could barely wait two weeks before they flipped more than half, or 53% of the full take down, right back to the monetizing hands of Brian Sack: 92.8% of the entire POMO consisted of just one issue - the just issued PY0 from last week. And so the shell game continues, especially since the interest paid on this $7.657 billion to the new holder, the Federal Reserve, will promptly be remitted back to the Treasury to be counted as revenue.

Not sure what rumor can be spread to unspook the market into believing all is well here, but the widely expected March deterioration in Europe which nobody wants to talk about, is happening just as predicted: Greek CDS have just hit an all time wide of 1,036 bps or something like 17 pts up, while Portuguese bond yields have just passed into fresh lifetime highs of 7.65%. As per the Chairsatan, this is purely driven by inverse demand courtesy of surging global economies around the world, which are all experiencing inverse peace and prosperity.

Remember when Egypt said that March 6 is the latest, guaranteed stock market reopen, or else? Well, the day has come and gone, and no Egypt stock market (all those who have been buying the EGPT ETF are forgiven for feeling like total idiots right about now). What however is trading are Egyptian bonds, which have plunged as a result of the ongoing total and complete chaos in the revolutionary country, which is now seeing a second wave of reactionary violence as fighting escalates between the police and protesters in Alexandria. As BusinessWeek reports: "Egypt’s borrowing costs are rising to the highest in more than two years
and stocks listed overseas are tumbling as the Cairo exchange’s
five-week shutdown and new rules on shareholder disclosure keep
investors away. The Ministry of Finance sold 3 billion pounds ($509 million) of bonds
yesterday, 1.5 billion pounds less than planned, as yields on 266-day
notes climbed 31 basis points from the last auction to 12.47 percent,
data compiled by Bloomberg show. Global depositary receipts of
Commercial International Bank Egypt SAE sank 15 percent in London last
week to the lowest level since July. Orascom Telecom Holding SAE traded
5.2 percent below its Jan. 27 close, when the Egyptian Exchange shut
down." Our advice: don't expect Egypt to reopen any time soon, and certainly not before the situation in Libya is under control, which won't be for a long time. In the meantime the flight to safety trade (read gold, silver and crude) is raging overnight. And if and when it reopens, look for nothing less than freefall: "The EGX30 may drop another 10 percent when it eventually reopens, said
Slim Feriani, London-based chief executive officer of Advance Emerging
Capital Ltd., which manages $750 million in frontier and developing
nation stocks including Egyptian shares."

It seems there is just one market which the Fed is either unable, or unwilling to manipulate: that of Portuguese (and generally peripheral European) debt. And for good reason. As the WSJ reports, Portugal started the year with about €4 billion in cash: "Fresh borrowing and other public transactions suggest Portugal has this
year likely increased that number to around €4 billion. The official
said in an email that the figure had risen but didn't elaborate." There is one small problem: the country has a €4 billion outflow on April 15... and has to pay down €20 billion worth of debt maturities and budget deficits through the end of this year! Where the country will get this money... nobody knows. Just BTFD. But not in Portuguese bonds. As the charts below show that is still the only asset that can't find a greater idiot.

Today's POMO closed with the Fed monetizing its usual fare of $6.69 billion in various 3 Year bonds, at a 5.81 Submitted-Accepted ratio. The surge in the S/A ratio is not surprising: a quick look at the internals shows just what the reason for the Primary Dealers' urgency was. Of the entire POMO, one CUSIP: the just auctioned off QH6 3 Year which was sold by the Treasury not even 2 weeks ago represented a whopping 81.1% of the operation. Observant readers will recall that this was the Cusip that was massively monetized ten days ago, when $5.3 billion of QH6 was purchased by the Fed. In other words, in under two weeks, the Primary Dealers have flipped over 50% of their original take down of the auction, or $19,890,840,000! In other words, had the Primary Dealers indicated their true interest in the bond, not accounting for expectations of an immediate flip back to the Fed, the auction would have been a failure. In this way, the Fed has now monetized 33.5% of the 3 Year that was sold to the unwitting public and foreign banks. Luckily, there is a 35% SOMA limit on Treasury holdings. Oh wait, that was scrapped as part of QE2.

Fairly quiet day, next week to round out February's issuance, early in the week we have a couple of bill auctions.

“Conman” is a term for Confidence Man – in his usual role, the con man does something to gain someone’s trust or confidence and then when the person is least expecting it, the con man steals some form of wealth from the unsuspecting victim. The greatest long cons to come out of Hollywood naturally include the 1973 Oscar winning “The Sting” featuring a young Robert Redford and Paul Newman, as well as the 1988 hit “Dirty Rotten Scoundrels” supported by Steve Martin & Michael Caine. Unfortunately for the World, today we are also experiencing another long con and it’s in the bond market. This is a very dangerous con and the victims have no idea it is occurring.

And so the Illinois pension bomb has been kicked down the street for another few months. The state just priced its delayed $3.7 billion bond courtesy of a plethora of International Wealth Funds. As the WSJ reported earlier "Initial indications on the deal Tuesday showed $6.1 billion in orders, with around a fifth of those coming from international investors, such as sovereign-wealth funds and insurance companies, one market participant said." The use of proceeds, as reported previously, is to fund payments to state employee pension funds. In other words, Illinois pensioners are now on the hook to the periodic generosity of bondholders to make sure there is enough money in the pot to fund their retirement.

Meanwhile, not letting any parabolic blow off in silver crisis go to waste, the Criminal Reserve and the Criminal Dealers engaged in another gang rape of whatever is left of the US middle class. Today's POMO, which closed with $6.688 billion of 3 year bonds getting monetized (at a whopping 5.6x Submitted/Accepted ratio), basically consisted of just two cusips: the 912828PQ7 and the 912828QH6. Of these two, QH6 represented $5.285 billion or 80% of the entire POMO. Why is this interesting? Because this CUSIP was auctioned off ten days ago, with an actual issuance date of February 15. That's Tuesday. The Fed just monetized bonds that were eligible for trading for a whopping 3 days! The daylight robbery, and the PD fringe benefits, continue as nobody apparently has the guts or half the brain to understand just how criminal this set up is. Luckily, everyone will magically, and very retroactively "know" just how ominous this now daily occurrence was after the next and last crash.

Can the ECB outspend the Bond Markets? Is Portugal truly Insolvent? Will they default? What happens to rate sensitive assets that are already at depression levels, such as real estate, when rates spike world wide? Why am I asking questions that everybody already knows the answer to???? Well, just in case, here go those answers anyway.

Just in case someone fell for Van Rompuy's earlier joke that "the euro is a stable currency with strong fundamentals", and/or was wondering what the reason for repeating this particular lie once again was (now if we was talking about the CHF, we would certainly believe him), look no further than Portugal. The one story that nobody continues to talk about, and which will come to a head in less than 2 weeks, as Knight Capital made clear previously, continues to get little coverage, and despite hopes and dreams of some miraculous EFSF rescue mechanism (which will prove woefully inadequate once the chips start falling), spreads are leaking. Oddly enough, the ECB has not stepped in yet to shovel another €1 billion worth of decomposing sovereign bonds under the European rug. Perhaps it is time to refresh on that huge surge in borrowings under the Marginal Lending Facility, and for someone at the ECB to explain just why and how this happened.

There is a real sense of the “calm before the storm” in markets globally. Complacency reigns, despite signs that the sovereign debt crisis in Europe is deepening and that Japanese and US bond markets also look very vulnerable due to rising inflation, very large deficits and massive public debt. US Treasuries have been sold by some of the largest investors (both private and sovereign) in the world recently (see news). These include large creditor nations Russia and China but also PIMCO, the largest bond fund in the world. A global sovereign debt crisis is now quite possible. At the very least, we are likely to have a long period of rising interest rates which will depress economic growth. Contrary to some misguided commentary, rising interest rates will benefit gold as was seen when interest rates rose sharply in the 1970s. It was only towards the end of the interest rate tightening cycle in 1980, when interest rates were higher than inflation, that gold prices began to fall.