Bond

Trust the Criminal Reserve and Criminary Dealers to take advantage of the cover provided by the Egyptian revolution to sneak a quick Flip That Bond in there. Today's POMO closed with $7.375 billion of bonds monetized out of $24 billion in submitted offers. The Submitted to Accepted ratio was 3.3x, but as usual the trickery lies just below the surface. As usual the just issued bond, the 2.625% of 2018, accounted for the bulk of the POMO. In fact, at $3.899 billion, the PT1 represented 52.9% of the entire POMO. With PDs having taken down $12.2 billion of the issue at auction, they have just reduced their holdings by 32%. But wait, there's more: on the February 3 POMO PDs put back $5.2 billion of the PT1 CUSIP. So between today and the last time the 7 Year bond (which was just auctioned off two weeks ago) was monetized, Primary Dealers have already given back 75% of the entire take down from the January 27 auction! So while Egypt has just turned a new page in its history, things in the US continue grinding just along the good old and very predictable "rape the middle class" status quo.

Gold, and particularly silver, lease rates (see chart) have been rising recently. The rate is found by subtracting the silver forward offered rate from the London Interbank Offered Rate (LIBOR). This likely signals increasing tightness and illiquidity in the bullion markets (as recently said by Sprott Asset Management, and UBS yesterday). The rise in silver has been very sharp, having gone from 4.29 basis points (0.0429%) to 77.65 basis points (0.7765%) since the start of the year (31 December 2010). While the rise is very sharp, it is important to put it in context, and silver lease rates remain well below the levels reached after the Lehman Brothers systemic crisis in late 2008 when silver lease rates surged to 2.5%. At the same time, the very small silver bullion market is clearly under strain as seen in the continuing backwardation. This clearly shows that demand for physical is robust, evident from retail demand in the US where there were record US Mint silver eagle sales last month. There are delays (3 to 4 weeks) to get branded LBMA silver bars (100 oz) in volume.

With all the discussion over how "stable" Europe is in the past month, one might actually take the European bankercrats' word at face value. And nothing could be more hazardous to one's health than believing a corpulent gentleman from Brussels. Because while Herman Van Rompuy is literally sending out haikus via twitter, his continent continues to burn. Today, the Portuguese 10 year hit a fresh lifetime high yield (and low price for those who failed bond math 101). One would think that with virtually everything backstopped by the ECB, Europe would show at least some resiliency. No such luck. In fact, things are getting progressively worse as Germany continues to procrastinate on the one decision that has any hope of being at least a stop-gap interim solution, namely a united bond issuance authority. Instead, Europe continues to go all in on its failed EFSF contraption which will work for a few months, and then will have to be bailed out with an even bigger CDO: an EFSF³? The only question around this time is who is indicating (wink) that they are long the equity tranche? As for Portugal's completely non-viable interest rate: just close your eyes and stick your hand in the sand. Trust Bernanke- it works for him (and he is a Ph.D.).

The Criminal Reserve once again lives up to its name...

Claims that total defaults in the municipal bond market could reach $100 billion are vastly exaggerated. Teachers will starve, police and firemen will go on strike, and there will be rioting in the streets before a single interest payment is missed to bond holders. Defaults will rise, but it will be from two to only 20, not the hundreds that Whitney is forecasting. Have I seen This movie before?

Just in case you were expecting a full recovery on those Greek bonds stashed away under the mattress (ahem ASSGEN) here comes Euro Intelligence to spoil your day (and maybe, just maybe, wreak some havoc with your CDS). In a nuthsell: we are about to see a Brady plan with 35% haircuts. If true, we may be seeing some pretty interesting unintended consequences in the near to very near-term future.

In today's episode of "Flip That Bond", the Primary Dealers succeeded in flipping a whopping 26% of the just auctioned off 1% of 1/25/2014 (912828PQ7) back to the Fed. Today's POMO has closed with $7.720 billion in bonds maturing between 2013 and 2014 monetized by Sack Frost, of which, and this should come as no surprise to anyone, the bond most put back to the FRBNY, to the tune of $3.7 billion or 48% of all, was PQ7. Keep in mind that the PD take down in this bond was $14.2 billion. Just two weeks later the Primary Dealers have reduced their positions in this most recent auction by 26%. In other news, there is no monetization. And Tim Jeethner pays his taxes.

The Fed's blatant "Flip That Bond" criminal reality show, funded entirely by you, dear taxpayer, continues, and is in fact accelerating. Over the weekend we provided a list of the 10 cheapest bonds that the Fed should monetize based on their relative position on the spline, in terms of cheapness/richness (link) and implied that should the Fed veer away from this list, it would be engaging in what is certainly non-fiduciary activity, by merely facilitating taxpayer rape on behalf of the Primary Dealers who "put" to Sack Frost whatever issue they want, and certainly not the cheapest ones to be monetized by the US taxpayers (i.e., an act that would at least pretend to save some money). Specifically, we said: "The just auctioned off 2.75% of 12/31/2017  is not even among the top 10 cheapest bonds, which means that if on Monday the PN4 makes up for a material percentage of the $7-9 billion buyback, then something is very, very wrong." Well, one look at the final completion list of Today's POMO indicates that it is preciseley the just auctioned off PN4 due 12/31/2017 that made up over half of the entire bloody operation! At 4.551 billion (out of a total $8.869 billion in bonds monetized), the Fed actively conspired with PDs to defraud taxpayers by engaging in monetization not of bonds that were cheapest and thus bonds the Fed should have been buying, but merely was taking the other side of the trade in today's version of "Flip That Bond." And so the criminality continues unabated.

When a week ago we observed the Onionesque reality of life in the Ivory Coast, where deposed president Gbagbo is threatening to wipe out bondholders of $2.3 billion in debt (Corporate Ticker: NUTZ) unless he becomes formally recognized, we made the following bold prediction: "we are sure that Blythe Masters and her team were recently in
Yamoussoukro discussing the most effective way to corner the cocoa
market (paper Cocoa ETF?), thus getting the price of the sweet powder up
by a few trillion percent (in exchange for a nice 25% of all upside
going to Jamie Dimon's firm of course)." Sure enough, when it comes to our track record of macabre predictions we continue to be near 100%. The FT has just reported that Alassane Ouattara, Laurent Gbagbo's opponent in the presidential election (and the man formally acknowledged by the UN as the country's president) has just imposed a one-month export ban of cocoa, ostensibly in an attempt to oust Laurent Gbagbo. In other words, the international community has to choose: bond recoveries or chocolate. That said, we are certain that it is none other than noted commodity market cornering expert JPM that can claim league table advisory credit for what according to the FT will be a 10% jump in the price of cocoa on opening Monday. The immediate retaliation by Gbagbo will most certainly be to force a technical default on the country's bonds which are already in their grace period, and start a localized mini liquidity (and solvency) crisis in Africa... As if the developed world did not have enough of those as is. And in the meantime, we sense a great disturbance in the inflationary Force, as if millions of fatty voices suddenly cried out in terror, and were suddenly silenced: prepare for the next round of food inflation worldwide.

Ok this is it. Someone (preferably of the less than multi-millionaire Wall Street marionette variety) in Congress has to look into the blatant bond churn-cum-flip (that was happening behind the scenes a few months ago and is now so blatantly in your face it is a slap to all US taxpayers) which has the Fed paying Primary Dealers billions in commissions for a trade that has absolutely no value added. And while we have been complaining about this for months, today just takes the cake. Below we present the entire list of permitted issues to be monetized by Frosty-Sack. Note that there were 29 CUSIP eligible for buybacks. What happened - the Primary Dealers flipped virtually the entire operation in the form of the just auctioned off 3 Year PQ7! This is half the entire Primary Dealer allocation in the bond auction that was completed on January 11 (whose technical original issue date was yesterday). One more 3 Year POMO, the next of which is on January 31, in which PDs flip a like amount, and the Fed will have monetized the entire auction, but in the process having paid at least a few hundred million of taxpayer capital to the PDs for absolutely no value added! This is a daylight robbery and has to stop.

We often disparage the Wall Street Journal for being too spineless to tell it like it is when reporting on the state of the economy, but with last Friday’s lead story, New Hit to Strapped States, they pulled no punches. You can almost pick a paragraph at random and get a sense of how serious the cities’ credit problems are. This paragraph, for instance “Municipalities borrowed $122 billion of variable rate demand debt in 2008, roughly twice the amount of these types of loans borrowed the year before…” How did they get in so deep?

The reverse dutch auction model for Europe's insolvent countries is dead. Earlier today Spain announced it would cancel its planned bond auction for January 20, and instead plough ahead with syndicated issuance. For those unclear with what this means, Spain is essentially saying the market pricing mechanism on its debt is too transparent and adds "volatility" and therefore the country would rather have banks underwrite the whole issue i.e., take the issuance risk on their books, thus spare Spain the embarrassment of a failed bond auction. And Spain is just the start: Portugal and Belgium have followed suit, in an action that is sure to stretch the already frayed nerves of European sovereign bond investors as this kind of last ditch effort is always taken before something is about to go "snap." From the Irish Times: "Spain's Treasury, facing a volatile market as it looks for ways to keep its debt costs under control, cancelled a bond auction planned for Thursday and said it would issue a syndicated bond over 10 years. Belgium is also seeking an opportunity to place debt with a syndicate of banks and Portugal also plans one for the first quarter, as fiscally stretched sovereign issuers elsewhere in Europe also seek to cut spiraling financing costs." And lest readers get the impression that this is purely a European development, China just announced that it is suspending its sterilization bill sales for the balance of the week. Did the European bond market suddenly die?

Some good charts ...

Adding insult to injury for holders of muni bonds, whose assets have plunged in value in the past month, pretty much as expected in light of pervasive state insolvency which is no longer being masked by the government's generous "Build America Bonds" distraction, is Charlie Gasparino's breaking news that now the SEC has gotten into the fray, and is looking into muni bond prospectus disclosures. Per Gasparino: "What they are looking at whether municipalities, cities and states, are adequately disclosing their budget woes to investors who buy these bonds." Which only means that as the risk of further pervasive impropriety is unearthed, and the muni space ends up being as much of a fraud as the MBS one, that the risk of holding on to MUB-derivative equivalents will only get higher, leading to yet another round of sell offs now that the muni bond situation has entered a toxic spiral where, in the inverse of the stock market, any news creates merely greater selling pressure.

While Illinois' desire to finally tackle its unsustainable fiscal situation is admirable, the process is starting to disclose some very stinky rot below the surface. On the heels of the recent hike in the corporate tax rate, today Bloomberg reports that governor Pat Quinn is asking lawmakers to authorize an $8.75 billion bond sale. The use of proceeds? To pay $6 billion in backlogged bills: read invoices that the state has been unable to pay so far due to what technically should be classified as a liquidity crunch, and non-technically as complete lack of cash. Luckily, entities that are owed money by the state at least have a chance to get paid. Earlier, state House of Representatives defeated a borrowing bill that was designed to
eliminate the pile of invoices that is at least five months old. The state's payment delinquency also includes pension funds: local underfunded pensions are owed almost $4 billion in payments by the state. In the meantime, Chicago CDS dropped on the news of the tax hike, declining from 28 bps to 300 yesterday, the lowest since December 9. Whether this means that the state will be able to find sufficiently stupid investors whose capital will go to nothing besides funding overdue invoices, is a totally separate matter however. Perhaps a good indication of the ravenous appetite for muni debt (in addition to the fresh 52 week low in virtually every single muni bond fund), is that the New Jersey agency has shrank the size of a proposed $1.2 billion refinancing offering by roughly 40% and hiked yields on the sale as it struggled to market bonds to investors on Thursday. As the secondary muni market is plunging, the primary market for issuance is on the verge of shutting down completely. Cue in QE3.