The Market Ticker - Bonds

Kaaaaaaaa...... BOOM! (Fannie/Freddie)

nospam@example.com (Karl Denninger) — Fri, 05 Mar 2010 11:59:00 -0500

March 5 (Bloomberg) -- Fannie Mae and Freddie Mac bondholders shouldn’t assume the government will make them whole on their investments as Congress retools the companies, House Financial Services Committee Chairman Barney Frank said.

Heh, who's the biggest individual bondholder?

Mr. Bernanke, the bond market is on line #1!

Frank continues:

A “whole range” of options is being considered for investors in the two government-seized companies, “from paying nothing to a haircut to whatever,” said Frank, whose committee oversees Fannie Mae and Freddie Mac.

Nothing? You mean zero, zilch, bupkis?

That would be rich. After Bernanke stepped in and bought some $200 billion of their debt, to have it "marked to zero" would be the ultimate slap in The Fed's face for buying that which I have argued is impermissible under the law.

What an elegant solution to a difficult problem - "oops - tear 'em up jackass - you should have known better than to buy something that you weren't allowed to and was patently worthless!"

The irony of that outcome would be delicious. Yes, I know I'm dreaming here - or am I?

“Please don’t think this is federally guaranteed, I don’t think it is, I don’t think it should be, I don’t feel any obligation to bail you out,” Frank said. Congress will “certainly not” extend any new protections to bond and mortgage-security investors beyond what exists, Frank said.

Oh. You mean that the face of those prospectuses mean what they say? You mean this is real?

Uh, the market is kinda ignoring that right now, isn't it?

Yes, I think it is.

How about this for a clear statement?

“We’re not remaking Fannie and Freddie,” Frank said. “We’re going to start from scratch and do housing finance.”

Go ahead folks, keep buying. This is spelled "opportunity", thank you very much. Now please excuse me while I go put a few chips on "red."

PS: Why are these stocks still listed again?

Bondzilla Eats The Church

nospam@example.com (Karl Denninger) — Tue, 23 Feb 2010 16:04:00 -0500

Well, maybe not yet, but....

Today, Members of Congress have an opportunity to set out on the road to recovery by agreeing to co-sponsor the Accurate Accounting of Fannie Mae and Freddie Mac Act. Authored by Representative Scott Garrett (R., N.J.), the bill would require that taxpayers receive an honest accounting of their exposure to the failed housing behemoths.

The Obama Administration has refused to provide such an accounting in its official budget, which is indefensible under traditional rules for government-sponsored entities. As the Congressional Budget Office (CBO) pointed out last month, since the government placed Fan and Fred in conservatorship and Treasury took controlling ownership stakes in 2008, "those actions make Fannie Mae and Freddie Mac part of the government and imply that their operations should be reflected in the federal budget."

Of course it's indefensible.

But heh, this is nothing new. The biggest problem with these "factories" of housing BS games is that their balance sheets are about as transparent as a piece of plywood, they have a documented history of cooking their financial reports and they're raw political tools of people like Bwarney Frank.

I called for this when the government first provided "support" to these "institutions." Frankly, they need to be shut down and put into run-off - it's the only thing that makes sense. Those who argue that we "won't have a housing industry without them" are simply wrong - we will have a housing industry - a sound one, based on sound credit fundamentals, instead of a serial bubble machine that our government attempts to keep inflated even though it has already popped!

But short of that we must have transparency and accountability, and the only way to accomplish that is for the GSEs to be formally placed "on sheet" where we can all see exactly how ugly things really are.

Whether this provokes Bondzilla into waking up is an option question - frankly, I'm stunned that he hasn't already stepped on a few buildings. Nevertheless no institution, including our government, deserves to get away with raw misdirection and outright accounting fraud.

This Is Some Odd Stuff (Bonds)

nospam@example.com (Karl Denninger) — Tue, 23 Feb 2010 13:26:00 -0500

The 4-week bill auction had a jaw-dropper in it:

Note the indirect bidder and low yield amount.

Someone wanted to park $6 billion and was willing to take zero to do it. $6 billion isn't that much money, all in, given that this category typically includes foreign central banks and such.

Is this particularly of note? Well, given the bad confidence numbers, perhaps not. But then look at the 13-week bill in the IRX...

Uh, what's that about?

The median for the 4-week bill was 0.04%, but the 13-week is trading at 0.12% or three times higher, and has spiked 40% today?

What?

The rest of the curve is getting smacked a good bit as well, but that should not surprise given the equity market action today.

Which way this resolves should be interesting. Also interesting should be The Fed's reaction if the IRX keeps climbing...

30 Year Auction: A Solid "F"

nospam@example.com (Karl Denninger) — Thu, 11 Feb 2010 13:28:00 -0500

There's no other way to describe this:

Bad. Actually, let's go worse than bad and call it what it is - by any definition this is just one step off from "Failed."

Yield was way over where it was trading at the time, as you can see here:

The more-worrying factor here is that we've got this "mystery" direct buyers out here again taking nearly 25% of the offered amount (who is bidding for that undisclosed?) and another 11% taken down by The Fed for the SOMA account.

Yet even with this Treasury had to pay up to get it to go and the bid-to-cover was anemic at best.

Given the Primary Dealer system we have in this country, any BTC under 2.0 is an effective fail. To get an auction that behaves in this sort of fashion, complete with mystery direct bidders and heavy SOMA (Fed) participation, yet Treasury has to pay up in the form of a significantly higher coupon is not a good sign at all.

Remember folks, this sort of issuance isn't a local event. It will continue through the year, as we are on track to run record budget deficits, so the premise that "it will all be ok and this won't start a ratchet up of rates on the long end" is perhaps more than a bit fanciful.

Rick Santelli gave the auction an "F" and I agree - there's simply no possible way to read this as anything positive at all, and that the equity market is ignoring it (other than a quick, small spike downward on the release) likely has more to do with how tightly equities have become coupled to the dollar in the last couple of weeks than anything else.

Uh, What's Up With "Effective Zero" Auctions?

nospam@example.com (Karl Denninger) — Mon, 11 Jan 2010 12:10:00 -0500

I thought that the effectively-zero bill rate auctions were all about window dressing for the banks on their year-end "balancing"?

Then what's this about?

13 week bill at FOUR basis points, and the 26 week bill at THIRTEEN, with bid-to-covers over 4.0 - that is, for every dollar of offered 13 or 26 week debt there were FOUR bidders, essentially all of it "primary dealers" (big banks)?

Ok, 'splain this: Why are the "too big to exists" parking money with Treasury - and a hell of a lot of it too - at effectively zero interest?

We're talking about $28 billion here - this is not small potatoes.

Is this simply "we have nothing productive to do with the money and we're frightened of higher interest rates" or do these bankers smell smoke?

Uhhhhh... Ok, Keep Buying Fools

nospam@example.com (Karl Denninger) — Mon, 04 Jan 2010 15:26:00 -0500

Following up on the earlier ticker....

Yeah, it's a great idea.

Yeah, ok, there's nothing going on here.... no problem with corporate credit, whether high yield or otherwise. Seriously, trust us.

There's no need to worry or rush the door - that's not smoke you smell, it's the guy over there by the punch bowl with a bong. Really, come on over, buy some more stocks and enjoy the party! First hit is free so long as you buy 1,000 shares of SPY along with a bunch of GS, BAC and JPM!

Carnage Continues: PHK (Who Smells Smoke?)

nospam@example.com (Karl Denninger) — Mon, 04 Jan 2010 13:32:00 -0500

The "rumor on the street" at the time of the dump in PHK a few days ago was claimed to be a "fat-fingered" trade.

Uh huh.

Let me guess. We've had three fat-fingered days in a row, right? The first one which was an honest mistake, and now two days of follow-up which were also honest fat-finger mistakes?

Pretty impressive to lose all of the gains since October - in three days.

Of course this isn't being discussed on CNBS, nor the real reason for it, nor is anyone calling out those who disseminated the "claim" that this was a "fat-finger" mistake originally.

Yeah.

This is high-yield debt by the way. A PIMCO fund on top of it. Closed end, and yes, it does trade at a rather insane premium to NAV, but closed-end funds have a habit of doing that.

But gee, here we are in the New Year, the selling continues at ridiculous volumes compared to the historical average, and in a market where the DOW is up 160 points this issue is down another 5% today.

Who's whistling past the grave here? If there's a problem with the constituents in this fund then one has to ask if this is an "isolated incident" or whether it implies some really ugly things around the corner in the credit markets.

If you remember we had "little signals" like this back in 2007 - just before everything went totally to hell. Anyone remember this?

That's from 2007. There were a few "signals" in this fund during that year.... and of course we all know what came next.

If this is fund-specific then why is it showing up in DPO too - erasing all the gains back to JULY?

Uh huh. A 25% decline in less than 5 days eh?

I'll go out on a limb here a bit: The "fat finger" claim IS A LIE and there's something nasty brewing here that, as is the usual practice, has been leaked to certain "privileged" players in the market.

You're welcome to believe this won't infest and reflect into the broader marketplace. I believe, as has been the pattern over the last several years, one ignores signals like this at considerable peril.

You, the ordinary trader and investor, will never be "cut in" on the deal and given the opportunity to get out before the curtains are on fire and people start succumbing to the smoke, and those who both leaked whatever inside information there is and who traded on it will not go to prison for doing so.

Nor will the "mainstream media" investigate this and report on it. Not on CNBC, not on Bloomberg, not in the Wall Street Journal, NOWHERE.

Your only defense is to look for signals like this and get damn defensive when you see them - right or wrong - because someone who has more information than you do certain as the sun rising in the eastern sky is doing exactly that.

THE MESS IS NOT OVER: EuroZone

nospam@example.com (Karl Denninger) — Thu, 17 Dec 2009 08:02:00 -0500

I keep trying to warn people.....

LONDON, Dec 16 (Reuters) - Standard & Poor's on Wednesday put about 1.46 trillion euros ($2.127 trillion) worth of covered bonds on credit watch negative or developing, based on new criteria for rating such securities.

$2.12 trillion worth of covered bonds?!

What is a covered bond again?

Covered bonds, usually rated triple-A, are regarded as low risk because they are backed by mortgage assets or loans that remain on the issuing bank's balance sheet, but the credit crisis prompted S&P to revisit the way it rated them because of concerns over what would happen in a bank default.

Oh, mortgages and loans eh?

"AAA" eh?

Is this sort of "AAA" the same sort that our subprime MBS got?

So let's see. Instead of selling the loans we keep them and then sell bonds against them, thereby "covering" them with the "asset." This works great until the underlying collateral quality goes to hell and the borrower defaults, at which point the bondholder has recourse against the issuing bank!

When that issuing bank is geared at 60:1 (as some in Europe are) guess what happens?

This is the definition of "AAA" right? A bank that is geared up 30, 40, 50, 60:1 - and that's the ultimate recourse on the bond?

How do you say "debt pyramiding" - an act that every competent underwriter or credit analyst knows is a serious risk? But no! We should rate this eurotrash "AAA" so we can find suckers, er, "investors", who will soak up this trash and make even more risky lending possible!

I think we need a new rating: TOP - for "Triple Ocular Penetration" (thanks to the forum but I can't find the person's login to credit him or her properly :-> ) - and we should definitely assign these "covered bonds" this new rating.

Oh and these crafty bankers would never get themselves into a duration mismatch problem would they? You know, sell short-term bonds against 20 or 30 year loan obligations - thereby putting them at risk of a rollover problem (where rates have spiked in the interim), making them instantly underwater (and remember, they're levered 30, 40, 50 or 60:1 over there - with no transparency - too!)

The bonds have relatively short maturities, but the pool of underlying mortgages backing them are usually 25-30 years. This raised concerns that in a default the mortgages would not raise enough to repay the bonds.

Oh, they did do that. Geez these bankers are really smart!

"Heh sonny, hold this thing for me while I pull the pin out.... and RUN!"

All the pumpers and media shills tried to tell us that the problems were behind us, and the economy and banking system would all be ok..... let's see, we have the PIIGS problem, we have Dubai, and now we have over $2 trillion of supposedly-"AAA" bonds that not only are the epitome of debt pyramiding but they've got duration mismatch problems - into an almost-certainly rising-rate environment - as well!

What could possibly go wrong?

TIC Data Confirms: Foreign Appetite Gone

nospam@example.com (Karl Denninger) — Tue, 15 Dec 2009 09:46:00 -0500

So the Obama Administration thinks it can issue $150 billion in new debt a month eh?

Here's the question: Who is going to buy?

I can tell you who isn't buying - foreigners:

Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been $8.3 billion.

Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities decreased $43.9 billion. Foreign holdings of Treasury bills decreased $38.3 billion.

This is a nasty box Ben and Timmy have painted themselves into.

$150 billion of net new issue a month - a run rate of $1.8 trillion annualized thus far - while foreigners are net sellers of Treasury instruments.

This leaves Ben and Timmy with an interesting proposition: to reverse this pattern they must improve the dollar balance and float rates higher, so that foreigners do not immediately suffer capital losses due to currency depreciation that wipes out their coupon earnings (and in many cases worse.)

Yet to strengthen the dollar the basics of supply and demand assert: you must limit the supply of dollars, or increase demand for dollars.

The former requires pulling liquidity.

The latter requires a cycle of debt repatriation or default.

Which will Timmy and Ben choose? If they choose neither then the the market will force the decision for them, as rates will inexorably back up, especially on the long end, until it becomes impossible to finance budget deficits.

The TNX blew a pennant channel this morning that targets around 4.5% on the 10 year bond. If that plays out things get very interesting very fast.

What's even more interesting is the inverted head-and-shoulders that validated this morning on the TYX - the 30 year bond. That targets around 5.1%:

These are not small changes. A 15-20% increase in funding costs at this end of the curve is going to create a very interesting dynamic for home mortgages and other long-term debt instruments. It will also drag up the belly of the curve, where the percentage changes are likely to be even more dramatic.

This of course hits Treasury interest expense which in turn puts pressure on The Federal Government and its spending.

The above chart looks bad. But this one is far worse, and if we hit that initial target we will confirm the larger H&S pattern:

This larger pattern targets 6.9% on the 30 year (long) bond, which will put 30 year conforming mortgage rates somewhere around 8% - and increase government long-end funding costs by some 53%.

I wish the best of luck to President Obama, Timmy and Bendover Bernanke.

The technicals on these charts, along with the evaporation of foreign Treasury Bond interest, strongly suggest all three of them are going to need it.

Hmmm.... Dubai (Again) - More?

nospam@example.com (Karl Denninger) — Sun, 13 Dec 2009 19:09:00 -0500

There is never only one

It appears, in fact, there are a lot of cockroaches.... not only is there an official bond issue (with potential default) there appear to be a who scad of contractors who haven't been getting paid for their work over there....

"Some Japanese construction companies are facing very serious debt problems as Dubai can’t pay,” said Seiichi Otsuka, the Japanese consul general in Dubai. “Some companies engaged with the construction of the Metro are facing some payment issues.” He said companies were also owed money by Nakheel.

Oh oh.... And how big is this problem? Nobody seems to be saying, exactly....

“It is inappropriate to reveal details about our arrangements with contractors as we respect the confidentiality of our business exchanges,” said a Nakheel spokesman. “We remain committed to working in partnership with our contractors over the long term.”

Is that especially true when you're not paying them on time... or at all?

Then there's this...

“Certain of the Nakheel Group’s financing arrangements may contain cross-default clauses whereby a default under one of the Nakheel Group’s financing arrangements may constitute an event of default under other” obligations, according to an offering circular for the Nakheel 2011 bonds on Bloomberg.

That could be fun. How do you spell "cascading boom-booms"?

Finally, confirming what I had suspected, the WSJ points out:

But the prospectus notes that "trusts" and "beneficial interests" are alien to Dubai's laws and that Dubai's legal system has no track record of adjudicating complex international transactions. Some other disclaimers: Dubai World, the chief guarantor of the Nakheel bonds, doesn't issue audited financials; the issuer has no attachable foreign assets; the real estate assets under the trust that secure the debt are located in Dubai, which likely wouldn't enforce a judgment from an English court, the document matter-of-factly explains.

So you mean that banks bought - and own - this crap even though there are no audited financial statements and there are no foreign assets that can be seized (those assets INSIDE Dubai can't be seized as they're formally the property of the Emir, and you can't seize the King's land you see.)

This looks like a prospectus for MBS that were stuffed full of liar loans!

Oh, You Think You're Gonna Crank Out Bonds?

nospam@example.com (Karl Denninger) — Thu, 10 Dec 2009 16:55:00 -0500

I'd give the 30 year auction today a big fat stinking "F"...

The so-called yield curve touched 373 basis points, the most in at least 29 years, as the bonds drew a yield of 4.52 percent, compared with an average forecast of 4.483 percent in a Bloomberg News survey of five of the Federal Reserve’s 18 primary dealers.

Mediocre demand Bloomberg goes on to say.....

Uhhhhh... no.

That might have something to with this from Politico:

In a bold but risky year-end strategy, Democrats are preparing to raise the federal debt ceiling by as much as $1.8 trillion before New Year’s rather than have to face the issue again prior to the 2010 elections.

“We’ve incurred this debt. We have to pay our bills,” House Majority Leader Steny Hoyer told POLITICO Wednesday. And the Maryland Democrat confirmed that the anticipated increase could be as high as $1.8 trillion — nearly twice what had been assumed in last spring’s budget resolution for the 2010 fiscal year.

America the subprime borrower.

Make no mistake - this is pushback. "We" didn't incur this debt Steny, you and your pals did. Remember, Steny, America said by a more than 100:1 margin NO to TARP. You passed it anyway.

You dished out over $1.4 trillion in trash last year, and are $300 billion in the hole in two months this year - already. For the math-challenged that's $1.8 trillion for this fiscal year, if your profligacy continues.

Go ahead, boyz, try to bail everyone out that's a Wall Street bigwig. Keep it up - the bond market will take care of you soon enough, and America will go "bang" - literally.

Oh, I'm not the only one saying it either. Nor is it just "bears" like Roubini. Try Australia's opposition finance spokesman Barnaby Joyce:

THE OPPOSITION finance spokesman, Barnaby Joyce, believes the United States government could default on its debt, triggering an ''economic Armageddon'' which will make the recent global financial crisis pale into insignificance.

Senator Joyce told the Herald yesterday he did not mean to alarm the public but there needed to be a debate about Australia's ''contingency plan'' for a sovereign debt default by the US or even by a local state government.

They're already making contingency plans down under..... is it time to short the US government - and should we go long baskets?

Just curious.

Priority? What's That?

nospam@example.com (Karl Denninger) — Mon, 07 Dec 2009 12:00:00 -0500

If you wondered how ugly things would get in terms of lenders ignoring priority (after the government wantonly did so) here's your answer:

A new foreclosure tactic, whereby lenders or debt collectors holding second mortgages freeze bank accounts or garnish pay checks of already struggling homeowners, is emerging and making it even more difficult for people to hold onto their homes.

It isn't supposed to work like that. See, that's the point of a capital structure - the first (secured) lienholder gets his, and if (and only if!) there's something left, the second gets what they can.

This is why a first mortgage is typically cheaper than a second, among other things.

If the subs are allowed to pull stuff like this then the damage to the first mortgage market could be tremendous - and result in a significant repricing of risk - and thus rates - upward.

Of course it's the government that started this crap with Chrysler, GM and others. Ignoring capital structure in order to favor certain politically-connected parties at the expense of those who (rightfully) paid for preference through lower coupon rates looked smart (for those who were trying to curry favor with those interest groups - cough-UAW-cough!)

But now we see that when one pulls this sort of stunt it spreads. And spread is the right word for what's going to start happening to lending rates - soon - if a sock isn't put in this.

This makes two stories today alone - the other being Saudi Arabia, of course - in which private parties are "learning" from the example set by government, simply ignoring capital structure whenever they think they can get away with it.

Congratulations are in order to Treasury, The Fed and Government - they've really made a mess of things now.

Heh, I Thought Dubai Was a Non-Event?

nospam@example.com (Karl Denninger) — Fri, 04 Dec 2009 11:05:00 -0500

Then what's this that the market is totally ignoring today?

Creditors of Dubai World are expected to reject a standstill agreement proposed by the company, threatening to drag out negotiations over $26bn (£15bn) worth of the conglomerate's debt.

Advisers involved in the talks tonight said that the process could take months as more than 100 accountants, lawyers, bankers and other professionals descended on Dubai from London. "There won't be a standstill agreement," one said.

Eh, that could get fun. Refusal to stand-still means there's an immediate default, which means the CDS go boom.

Me thinks the weekend could be verrrry interesting, especially given the "hype and hope" trading we've got in the US markets today on the employment situation report.

Question for the Peanut Gallery: Who holds the risk on those CDS, and how much?

Who Bought This Crap?

nospam@example.com (Karl Denninger) — Sun, 15 Nov 2009 10:59:48 -0500

You have to wonder....

Nov. 12 (Bloomberg) -- Goldman Sachs Group Inc. paid off at face value some junior-ranking slices of two collateralized debt obligations at the potential expense of more-senior classes that now are likely to default, according to Fitch Ratings.

Goldman Sachs, the most-profitable securities firm, applied its “sole discretion” to ignore standard payment priority and use cash in reserve accounts for the Abacus 2006-13 and Abacus 2006-17 CDOs to retire lower-ranked notes, Fitch said yesterday in separate statements.

....

“We are not aware of the use of this feature in other transactions we rate,” Trebach said in a telephone interview.

Let me guess - the inclusion of such a feature didn't factor into the ratings originally issued either, right? Yet this "feature" is, apparently, quite common?

From what I can discern from the article Goldman had every right to do this - even if it was due to their owning the paid-off pieces (thereby receiving full "par" value where other people would get screwed.)

The better question here is why anyone would ever buy something that includes a "feature" that allows the manager to exercise their discretion to screw more-senior holders at any time they wish.

Who, if I may ask, is dumb enough to buy trash like this?

Well, obviously there are some "someones", as it appears that this trash was sold and traded, and now Fitch has blown down the ratings of these un-redeemed tranches to "CCC", well below investment grade.

Some of the debt was originally rated "AAA".

One wonders how, given the presence of this "discretionary" clause in the original deal, since the premise of said "AAA" rating is the presence of excess coverage for the senior tranches provided by the subordinated components! If the manager has full discretion to remove that coverage at any time (as occurred in this case) then the original "AAA" rating, which envisions performance to maturity, was severely flawed at best.

Put bluntly, the so-called "credit enhancement" propounded to be present in the deal was fictitious and any "rating" predicated on same was false.