Bond

As the 10 Year continues to plunge, the one topic nobody on CNBC is daring to discuss is the absolute slaughter for all those calling for a steeper curve, and the resultant misery that banks are again experiencing as a result. With financials supposed to be the new market leaders one can't possibly bring up the sad truth that as QE2 fails, the US financial system will take the brunt of the hit. And even as Goldman and MS get their wish for a sell off in the 10 Year, unfortunately for them this is accompanied by a less than comparable dumping of the long-end, resulting in an even greater flattening of the curve, and validating our call from last night that the bond world is about to get a whole lot more flat. Lastly, as the 30 Year Cash Pay Mortgage jumps by 20 bps W/W, the result is about a $200 billion loss in home net worth in just one week. The Uberprinter is now torn whether QE3 should be one of monetizing municipals, or, as Bill Gross has been positioning so very well for the past two months, throw it all into MBS once again.

Today's tax compromise in the US extended all expiring Bush tax cuts by two years.  The story though does not end here.  The most important thing missing from the tax extension was the expected extension of the Build America Bond program.  The Build America Bond program has been the municipal market's saviour over the past 18 months.  Since their introduction in April 2009 more than 174 Bio USD of taxable securities have been sold by municipalities backed by the program, one where the US pays 35% of the interest due on the debt.On a day when the market focussed on the Budget vote in Ireland, a country that makes up about 1.8% of Europe's GDP, we are concerned that no one is looking at the growing problems in New York, California and Illinois, three states that comprise 25% of the US GDP. The expiration of the Build America Bond program could prove to be a terrible price for the US to pay and we expect squabbles in the US Congress regarding the bailing out of States in 2011 that could easily rival that which we have witnessed from the European Union over Ireland and Greece....We continue to expect that QE3 will include the purchase of Municipal debt, a true can of worms.

Goldman, which continues its near-revolutionary overhaul of its economic and market outlook, after suddenly and very embarrassingly hiking its economic outlook ahead of today's NFP number which confirmed that all those calling for an end to the recession were merely misled by the government (as Albert Edwards once again predicted spot on), was overdue for a change in its bond targets: after all there is no way the 10 Year can remain at 2.50% (the firm's old 10 Year target) if GDP is supposed to somehow grow to 2.7%. Sure enough, FUG (Franc Garzarelli, the man behind the firm's often very disappointing "Top Trade" recommendations) has just released the firm's new bond forecasts. And unfortunately, we get merely yet another indication that instead of being ahead of the curve, Goldman is now firmly behind it, and chasing either momentum or wrong conventional wisdom: the firm now sees the 10 Year going from its current 10 Year spot to 3.75% by the end of 2011, based on an "environment of strong growth, low inflation and a bond-friendly policy set-up." In other words: everyone pile into the reflation trade. We can't wait for two things: i) Rosenberg's retort, and ii) the over/under on how long before this latest flawed recommendation by Goldman is not only revised, but once again starts calling for a few trillion in QE (which just a month ago was supposed to be an addition $4 trillion - how quickly views change after a brief "closed door" meeting).

Zero Hedge is delighted to have officially gotten on Brian Sack's nerves: after everyone's favorite Fed offer lifter bought another $6.81 billion in bonds due 2013-2014 (at a Submitted to Accepted ratio of 3.2x) the week's last POMO is now over. However, to our delight, after highlighting repeatedly that over the past two weeks the issue monetized most by the Fed was the most recently issued bond in any given bracket, today, for the second day in a row, CUSIP PU8, the November 3 year auction, was once again put on the exclusion list, making life for flipping Primary Dealers just that bit more difficult. But don't worry: with November excluded, the biggest issue monetized by far, with $4.3 billion in purchases was the 3 year issued in... October (PB0). The net result is that instead of pocketing a ~$100 million bonus this year, the RBS/JPM/DB/GS/Jef/etc bond monetization team leader, will instead collect just $99 million of taxpayer money. We will continue tracking the exclusion list and hope to have finally put an end to at least this small farce in the Fed's monetization arsenal. In the meantime: may the farce be with you Brian Sack: please be advised that unless you close the market green we will all lose faith in your market manipulative skills (granted, the Obama mandated UI extension pass at all costs may explain a slightly red close).

Jean Claude Trichet has finally learned the Bernank's lesson #1 on Central Bankering: when all else fails, buy it all. The FT reports that according to traders the ECB was on Thursday buying Portuguese and Irish bonds in €100m tranches – four times bigger than previously, which in turn sharply brought down the cost of borrowing for Lisbon and Dublin and sparked a euro rally. Just like in the US, this means that virtually no assets reflect their true value, as the ECB is now monetizing debt, without even having formally announced it is doing so, either in a sterilized or unsterilized fashion. This means that next week's update of the ECB SNP programme will demonstrate a surge in bond buying. This is especially the case when factoring in that Trichet is currently out in the market waving every Portuguese Bond in. It is a sad day that the only way the ECB, just like the Fed, can create an upward move in an asset class only by forcing a short squeeze.

The ECB voted to keep rates at 100bps today, as expected, but did little beyond that as it became clear that Frankfurt is still backtracking from its “exit strategy” rhetoric from a couple months ago, rather than transitioning from planned exit to future expansion in one fell swoop.

Hearing that as the head of the ECB continues to not answer any question, his organization is buying Portuguese and Irish bonds actively. If the vigilante attack intensifies not even the ECB will be able to withstand the onslaught.

Today the market surged after it was announced that JC Trichet has finally thrown in the towel and will launch some version of "buy the everything" program made so popular by his bald transatlantic late-afternoon genocide buddy over the last two years. Subsequently the market surged more on a rumor that America would send a mega dose of viagra to make Trichet's "bazooka" even bigger by boosting America's, er, IMF contributions to what will soon be a multi-trillion bail out. Lastly the market surged some more when that last rumor was proven to be false. Which is why tomorrow at 7:45 am Eastern (with conference to follow 45 minutes later) the hapless Pinata formerly known as Jean-Claude Trichet, whose every action is now predicated by the markets, better have something good to announce or else the market will go up so more... just as it will if there is no news. So for all those who wish to know why buying stocks is a guaranteed way to make money now that nothing at all matters, here are JP Morgan's advance thoughts previewing the ECB action, as well as Greg Fuzesi's observations on additional bond purchases.

The Fed-Primary Dealer scam continues in plain view. After today's $8.2 billion POMO closed at a 3.7x Submitted to Accepted ratio (below median ratio - surge in stocks right on schedule), a quick look at the most monetized POMOs confirms that the near-immediate monetization of just auctioned off bonds continues. To wit: as can be seen on the table below, the highlighted CUSIP most monetized is PK0 (as we speculated earlier) to the tune of $1.4 billion or 17.3% of the entire operation. This is the 7 Year bond auctioned off on November 24. That's one week ago. And the market continues to pretend that the Fed does not buy bonds at auction. Why should it: the Fed continues to hand out billions to Primary Dealers courtesy of their transitory intermediation via the bid/ask spread and price-notional differences. Pathetic.

Today's much anticipated Portuguese T-Bill auction carried some good and some not so good news. While the Bid To Cover on the €500 million 12 month paper improved from 1.8 to 2.5, the rate on the 1 year issue surpassed 5% for the first time, and came wide of analyst expectations, pricing at 5.281%, compared to 4.813% previously. Per Reuters: " That was higher than the roughly 5 percent that dealers and analysts had looked for ahead of the sale, though the rise in short-term borrowing costs was much smaller than a more than 150-basis point jump at the previous tender in November.  "There is no place to hide on the curve for Portugal anymore. Once again, the auction increases pressure to find a circuit-breaker to limit the damage, which is most likely to mean asking for aid," said David Schnautz, debt strategist at Commerzbank in London." Filipe Silva, debt manager and Banco Carregosa explains why contrary to the EUR's reaction, this is not good news: "This rate is very high and Portugal cannot keep raising its rates at this pace, 47 basis points in just two weeks." Yet despite the weak auction, Sovereign spreads tightened modestly after rumors that the ECB would announce an expansion or a new program to buy peripheral sovereign debt. Which was to be expected: the Portuguese auction was quite irrelevant compared to what happened in Germany earlier, when the country held its weakest 5 Year Bobl issuance in 6 months: in an auction of €4.13 billion in paper, the government saw a mere 1.1 Bid To Cover, the weakest since May, and forcing the government to retain 17.4%, or €0.87 billion of the auction to make it not appear that the auction was a failure.

The ECB's Securities Market Operation is finally cranking. After a relatively quiet summer during which the ECB would monetize at most €200 million of sovereign bonds weekly, things got rather hot in early October when a record €1.384 billion was acquired. That was followed by the eye of the hurricane when in a period of 4 weeks nothing happened. Then November happened, and things got out of hand. Over the past month the ECB has finally started flexing it muscles, buying €3.845 billion in bonds, most of these Irish and Portuguese. Of course, this is nothing compared to what the US does, which is now buying about $8 billion a day. Then again, the ECB works differently by providing funding directly to member banks, thereby monetizing indirectly. The fact that it has upshifted its direct monetization efforts is troubling as it indicates that QC for the secondary route is collapsing and JC Trichet no longer can rely on his henchmen on the ground, most of which are gripped in a total liquidity drought. Altogether €67 billion in bonds have been monetized under the SMP. Look for this number to double on short notice should the contagion hit Belgium and Italy as is now widely expected.

Today at around 5 am Eastern Italy conducted an auction of 3 and 10 year paper. The result was a very weak auction with spreads jumping compared to the prior auction even as BTCs dropped. The Italian treasury sold €5.5 billion of the BTPs, compared with the 83.5 billion to €5.5 billion planned. It also sold €1.339 billion of the October 2017-dated floating rate bond, or CCTeu, compared with €1 billion to €1.5 billion planned. But the sale came at a steep price. The 3 Year sale of €2.5 billion 2.25% bonds closed at 2.86% compared to 2.32% prior, and a bid to cover of 1.38 compared to 1.35 previously. The yield on the 10 Year auction came at 4.43% or over half a percent higher compared to the previous auction of 3.89%, pricing at a 1.27 Bid to Cover, much worse than the 1.42 previously.

As we speculated two weeks ago, the key word that will be regurgitated by all pundits through the end of the year is "contagion". Sure enough, the bond vigilantes who are now fully awake and stretching have brought a mauling to Spanish bonds, where 10 Year yields are now at lifetime highs. The chart below shows what will happen to US bond prices sooner or later. Should the 10 Year experience such a move in a comparable time frame, the Federal Reserve's $56.3 billion in total capital will be exhausted about 4 times over, and Ben Bernanke will be presiding over an insolvent central bank, begging for intelligent life from Proxima Centauri to have departed about 4.27 years ago in direction earth, bringing with it an extra $1 quadrillion in Terra backstop capital.

Even as the world wakes up to a stunner out of Korea, things in Europe are getting worse. Here is a brief summary of all the events in the increasingly troubled continent.

Last week, the US Treasury issued $16 billion in 30 year notes due 2040 (CUSIP: 912810QL5) which was one of the ugliest 30 Year auctions in recent history (Santelli grade: F), and which we speculated may be a dud as PDs were not aware of what the POMO schedule would look like, and that in turn it would likely be promptly refunded back to Bernanke. We covered that issuance in detail. Today, Brian Sack just completed a $2.2 billion POMO focusing on bonds in the 17-30 bucket, at a relatively high Submitted to Accepted Ratio of 5.1x (and yes, the higher than median ratio may be an indication why stocks are red again as explained before). What is most notable is that the last bond on the accepted list (highlighted below), of which the Fed monetized $24 million worth, is CUSIP QL5: the 30 Year bond auctioned off last week. And so the shell game continues.