2 Year Auction Stops 0.4 bps Through, Prices At Highest Yield Since May 2011

While one may opine if today’s 2 Year auction was weak or strong, one thing is indisputable: at a pricing high yield of 0.511% (even if 0.4 bps through the When Issued), this was the highest closing yield for 2 Year paper since May 2011 when it priced at 0.56% just before the US debt ceiling debacle and US downgrade firmly reset the bond market far lower. As for the other components of today’s auction, the Bid To Cover came at 3.231, below the 3.519 from May, if just below the TTM average of 3.34. The internals were unimpressive, with Direct and Indirects splitting the post almost equally, getting just over 23% of the auction each, while Dealers were left holding 54.6% of the final allottment.

In short: a passable auction that did the best it could under the conditions. Still, considering these notes mature just outside of the period when the Fed is supposed to start hiking rates, it appears the bond market isn’t too worried about the FF rate hitting the 4.25% some Fed presidents put down on their dot plot.

via Zero Hedge http://ift.tt/1yKjOZA Tyler Durden

The Fed’s Hobson’s Choice: End QE/ZIRP Or Destabilize The Dollar & The Treasury Market

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

Though the Fed is doing its best to mask its abject failure and lack of choices with public relations, the reality is it has no choice but to taper and eventually end its endless spew of credit and its unprecedented and destabilizing purchases of assets.

Many smart observers assume the Federal Reserve (and other central banks) can print money and buy assets like bonds, mortgages and stocks unconstrained by any limit. Indeed, at first glance, it seems like a closed circle: print the money and use it to buy bonds, mortgages and equities, which are booked as assets.

The more the Fed buys (or enables proxies and financiers to buy), the greater the assets value, as buying pushes prices higher.

After all, look what quantitative easing (i.e. buying assets like Treasury bonds and home mortgages) and zero-interest rates have done for the stock market: to the moon, baby!

And to housing: thanks to the printing press and buying mortgages, the Fed inflated an echo-bubble to soften the inevitable crash of the previous bubble:

On the surface, there are no intrinsic limits to QE and central bank money-printing:in other words, there appears to be nothing stopping the Fed from printing essentially limitless money and buying up the majority of Treasury bonds, mortgages and stocks.

But we must be mindful that the economy is not linear. Pushing asset prices higher via unlimited credit at zero-interest rates has not trickled down to wages or consumer spending. That is, the wealth effect is missing in action despite a $20 trillion increase in household net worth. (Most of this increase flowed to the top 10%, and within that, most flowed to the top 1/10 of 1%.)

Meanwhile, risky credit bets are soaring: subprime auto loans are now common, margin debt has skyrocketed and purchases of junk bonds have gone through the roof.

The Fed's printing and asset purchases do not occur in a vacuum. Fed printing and asset purchases affect the reserve currency, the U.S. dollar, and the Treasury market, which the Fed now dominates via its purchases.

Keeping interest rates near zero has removed any financial incentive to buying Treasury bonds other than flight to safety. As Stephanie Pomboy observed in her excellent Wine Country Conference 2014 presentation, (and I paraphrase here): "every day they continued QE, they chased away more and more of our foreign creditors."

The Treasury must sell bonds to fund the Federal deficit, which is running about $500 billion a year. The Treasury must also sell new bonds to replace the immense amounts of T-Bills that are maturing.

The more T-bills the Fed buys to keep interest rates at zero, the more it drives foreign and domestic buyers out of the Treasury market.

This is also true of the U.S. dollar. This sets up the Fed's Hobson's Choice, which is the term for an illusory choice, i.e. a choice in which only one option is offered.

If the Fed continues QE, it destabilizes the Treasury market that funds U.S. government deficits, and the hegemony of the U.S. dollar. If it ceases QE, interest rates will rise as non-central bank buyers will demand an actual return on their capital.

Rising rates will crush the echo bubbles in housing and the stock market, which has been propped up by dividend-paying stocks and speculative issues purchased with Fed-supplied "free money."

For the Deep State, there is no choice: dollar hegemony is paramount. Rising interest rates and the fate of financiers who have over-leveraged the Fed's free money are not even secondary.

Who Gets Thrown Under the Bus in the Next Financial Crisis? (March 3, 2014)

The Dollar and the Deep State (February 24, 2014)

Is the Deep State Fracturing into Disunity? (March 14, 2014)

The Fed believed that five years of free money and incentivizing risk would heal the economy. They were wrong. The real economy is more fragile and dysfunctional than ever due to the distortions created by Fed policies, while the top 1/10th of 1% have feasted on the asset bubbles inflated by these same policies.

Meanwhile, beneath the crony-capitalist celebration of new asset bubbles, the foundations of the nation's fiscal security–the Treasury market and the U.S. dollar–have been undermined and destabilized by these same Fed policies.

Those who focus solely on the Fed assume the ruling Elite is monolithic: unified in worldview, strategy and goals. I believe this is overly linear and overly simplistic: there are competing elites, and nations fall when their elites experience profound disunity.

Though the Fed is doing its best to mask its abject failure and lack of choices with public relations ("Pay no attention to what's behind the curtain!"), the reality is it has no choice to tapering and eventually ending its gargantuan spew of credit and its unprecedented and destabilizing purchases of assets.

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Credit Suisse “Fear Barometer” Hits All Time High

As we noted moments ago, the “old” VIX just hit record lows (and with the “new” one is just shy of single digits, it is hardly an indicator of imminent panic). Surely complacency rules, sentiment which is confirmed by looking at such indicators as intraday trading ranges and (even more) evaporating volumes, not to mention a Fed which explicitly is now involved in market “valuation” exercises following Yellen’s statement that the market appears fairly valued (she will surely advise when it is no longer fairly valued).

So is it smooth sailing ahead, with the market firmly under the control of the Fed?

For one possible answer we refer to the latest note by FBN’s JC O’Hara who looks at a different “fear” index, namely the Credit Suisse Fear Barometer. He finds that, at 37%, it has never been higher.

For a succinct explanation of what this far less popular indicator captures we use a handy definition by SentimentTrader:



The CSFB is an indicator specifically designed to measure investor sentiment, and the number represented by the index prices zero-premium collars that expire in three months.


The collar is implemented by the selling of a three-month, 10 percent out-of-the-money SPX call option and using the proceeds to buy a three-month out-of-the-money SPX put option.  The premium on both sides will be equal, resulting in a term commonly known as a zero cost collar.


The CSFB level represents how far out-of-the-money that SPX put option is, or in insurance terms it represents the deductible one would have to pay before the put kicks in.


So, for example, if the CSFB is at 20, then that means an investor would have to go 20% out of the money to be able to buy a put with the proceeds from selling a call that’s only 10% out of the money.  That means there is more demand for put protection – a sign of fear in the marketplace.


The index would rise when there is excess investor demand for portfolio insurance or lack of demand for call options.


It differs from the Chicago Board Options Exchange Volatility Index or VIX. The VIX, calculated from S&P 500 option prices, measures the market’s expectation of future volatility over the next 30-day period and often moves inversely to the S&P benchmark.


The VIX is a fear gauge by interpretation, not by definition. It was designed to quantify the expectations for market volatility — a property that is associated with, but not always correlated to fear.



The Fear Barometer doesn’t work as most of us expect it to.  It doesn’t necessarily rise as the market drops, or fall as the market rises.  In fact, often it’s the exact opposite.


The reason is because traders in S&P 500 index options are mostly institutional, so the options activity is often a hedge against underlying portfolios.  So when stocks rise, we often see more demand for put protection, not less.


It turns out that these traders can be pretty savvy short-term market timers.  So when we see a sharp upward spike in the Fear Barometer, it means that traders are quickly bidding up put options, and the S&P 500 often sees a short-term decline soon afterward.


Conversely, when we see a sharp contraction in the Barometer (and the Rate Of Change drops to -10% or more), then we often see the S&P rebound shortly thereafter.

In brief: when it comes to the “here and now”, which in the Fed’s centrally-planned market is driven almost excusively by momentum ignition algos, complacency indeed rules. But even the nearest glimpse into the near future, or rather how the present environment may disconnect with what may happen tomorrow, or next week, or, as the case may be, in three months, institutional investors are more concerned than ever before. But is this a confirmation that the US stock market is about to have its own “Dubai” moment?

The answer is unclear. Recall that it is the same “institutional” smart money that has over the past 5 years been hedged by shorting a hedge fund hotel of most hated stocks: the same stocks which as we have shown time and again consistently outperform the market, due to one after another furious short squeeze. Perhaps hedge funds have gotten tired of “hedging” (and generating losses, with hedge fund alpha virtually zero since the Lehman collapse) using cash products, and are now simply rolling over collared protection with every passing month as the stock market rises to recorder highs, well above levels that in 2007 precipitated a crash that nearly wiped out the financial system?

As for whether they are right, well: the best person to ask is Janet Yellen of course. Because with the Fed now permanently broken the business cycle (as any prolonged downturn in the economy will merely bring the Fed back out of hiding and bidding up risk assets), virtually nobody knows just how to trade this centrally-planned construct that the Fed has unleashed on the world.

As for the retail investors, not only do they not know, but as it is quite clear by now, they don’t care either.

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If Every American State Was a Country, Which Would Have the World’s Highest Incarceration Rate?

If you’re a regular Reason reader, you probably know
that the U.S. has the world’s highest incarceration rate. Cuba
comes second, then Rwanda, Russia, and the rest. But what if we
treated each individual state as an independent nation and stacked
them all up against the rest of the world? Which place would prove
most prone to locking people up?

The Prison Policy Initiative has put together a pretty amazing
chart answering
just that question. First place turns out to go to Louisiana, which
locks up 1,341 people for every 100,000 residents. Thirty-five
other states have incarceration rates that beat the Cubans’, as
does the District of Columbia.

The least prison-happy state? Vermont. You can head down to the

to debate whether that’s because it’s full of
soft-hearted hippies or if it’s just that
those old people there
don’t commit as many crimes.

Bonus link: Our special issue on mass

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Obama, Putin Talk Ukraine; Russia to Revoke Own Authority to Intervene

President Barack Obama and
Russian President Vladimir Putin spoke over the phone yesterday
regarding the war going on between Ukraine’s government and
pro-Russian separatists in the country’s eastern regions. Today,
Putin made the surprising announcement that he will strip himself
of the authority to intervene in the conflict. It’s a move that
will likely be met with cautious optimism.

The White House
a statement on yesterday’s talk:

President Obama welcomed [Ukrainian] President [Petro]
Poroshenko’s peace plan and urged that Russia and separatist
leaders work closely with the Ukrainian government to take concrete
steps to implement it.  The President called upon President
Putin to press the separatists to recognize and abide by the
ceasefire and to halt the flow of weapons and materiel across its
border into Ukraine. The President emphasized that words must be
accompanied by actions and that the United States remains prepared
to impose additional sanctions should circumstances warrant, in
coordination with our allies and partners.

Indeed, just this past Friday the U.S. again
expanded its list
of individuals under economic sanctions for
destabilizing Ukraine. Whether sanctions are having a meaningful
impact is up for debate, though Russia’s economy
hasn’t been so hot
since the invasion and annexation of Crimea
in March.

For his part, “Putin stressed that priority must be given to
halting military operations and to the start of direct negotiations
between the opposing sides,” the Kremlin stated.

Today the Russian president
made a request
to the Federation Council, the upper house of
parliament, that they revoke his right to stage a military
intervention in Ukraine. Tomorrow they will undoubtedly approve his
request, just as they approved his request for that questionable
authority several months ago.

Although Ukraine’s president welcomes
Putin’s move as a “first practical step,” skepticism remains with
good reason. After all, Russia last week began to
regroup thousands of troops
near the Ukrainian border, less
than a month after promising to remove troops. And, the
separatists, some of whom
to be Chechen mercenaries on official orders, have an
uncanny ability to get their hands on
, rocket launchers, and other military equipment, and
earlier today they broke
a ceasefire
they agreed to several days ago.

Putin’s former chief economic adviser and current Cato Institute
fellow Andrei Illarionov
yesterday that Putin is, in fact, sending militants into
even more regions of the nation as part of “a new stage to
undermine the sovereignty and independence of Ukraine.”

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“Old” VIX Plunges To Record Low

Before there was VIX, there was VXO (or "old" VIX) based on OEX calls and puts and trading all the way back to 1985. Because it covers the 1987 crash period, traders often use it as a more consistent gauge. While attention is focused on VIX being 'near' record lows; VXO has just broken below the crucial 9% level that has only been breached once before and has hit a record low. As Citi warns, this suggests that we are very close to if not at the cycle low (for volatility) – though as we noted yesterday, it is unclear if this is a 'good' low (melt-up in stocks) or 'bad' low (crash).

For only the 3rd time in its history the VXOhas broken below 9%. The first time it did this was December 1993 (8.86%) and then Jan 2007 (8.99%). It came very close in July 2005 when it went to 9.12%.



But this week it it hit all-time record lows… or record highs in complacency.

*  *  *



The Chicago Board Options Exchange Volatility Index reflects a market estimate of future volatility, based on the weighted average of the implied volatilities for a wide range of strikes. 1st & 2nd month expirations are used until 8 days from expiration, then the 2nd and 3rd are used.


The CBOE OEX Volatility Index reflects a market estimate of future volatility, based on the weighted average of the implied volatilities of 8 OEX calls & puts. (The nearest in & out of the money call & put options from the 1st and 2nd month expirations)

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Gene Healy Says the Iraq War Was a Bipartisan Disaster

seems to be the hardest word for neoconservatives who championed
the Iraq War, but sometimes they manage to squeeze it out. Here,
for instance, is former Bush speechwriter Marc Thiessen in
Wednesday’s Washington Post: “Sorry, but this is a
mess of President Obama’s making.” It’s a common refrain among
unrepentant hawks, and an inaccurate one. Gene Healy argues that
the Bush administration’s war was a doomed enterprise from the
outset, and that a contingent of hawks on both sides of the aisle
are to blame for supporting and facilitating it.

View this article.

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Pro-Russian Separatists Down Ukraine Chopper As Putin Revokes Right To Military Intervention

In a rather stunning step for the West’s propaganda machine, ‘devil-incarnate’ Putin has asked the Russian parliament to revoke the right of military intervention in Ukraine. As The BBC reports, Vladimir Putin’s move was aimed at “normalising the situation” in the conflict-torn eastern regions of Ukraine, his press-secretary said. Ukraine added that this move was a “first practical step” towards settling the crisis in the east. Presidential spokesman Peskov said the move was linked to Monday’s launch of talks between Kiev and separatist leaders in the east (with the case-fire deadline ending Friday). One can only wonder, why now? for Putin’s gesture of peace? Cold showers enough in Kiev? Or is it that oil prices are high enough to help thanks to the Iraq situation and his Syrian ‘aid’ is needed as Ukraine festers?


Via The BBC,

Russia’s president has asked parliament to revoke the right of military intervention in Ukraine, where rebels have been fighting government troops.


Vladimir Putin’s move was aimed at “normalising the situation” in the conflict-torn eastern regions of Ukraine, his press-secretary said.


The parliament authorised Mr Putin to use force in Ukraine on 1 March.


Ukraine said Mr Putin’s latest move was a “first practical step” towards settling the crisis in the east.


In a statement, Ukrainian President Petro Poroshenko stressed that this came after Mr Putin had officially supported Kiev’s peace plan, which involved a ceasefire.



On Tuesday, presidential spokesman Dmitry Peskov said Mr Putin had sent a letter to the upper house of parliament, the Federation Council, asking to revoke the right of military intervention in Ukraine.


Mr Peskov said the move was linked to Monday’s launch of talks between Kiev and separatist leaders in the east.

So we have until Friday (when the cease-fire ends) to see whether this liftinmg of military force will stay and to figure out Putin’s sudden ‘Mr. Nice Guy’ game plan.

However, it appears things are moving a little beyond his and Ukraine’s control:


One can’t help but wonder at the timing and theater of it all… Who stands to benefit from ending the cease-fire in such a gratuitous manner?

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US Drones Strike ISIS Targets BBC Reports; Pentagon Denies

Moments ago, in what would be a clear escalation in the Iraq war, and confirmation that the US has finally gone “kinetic” as it warned on several occasions in the past it would, Iraq state-sponsored Iraqiya TV reported that US drones had struck ISIS targets near the Iraq-Syria border attack without giving details or saying how it obtained the information.

BBC Arabic has more:

U.S. planes bombed targets in the drone region based on the Iraqi-Syrian border, according to sources close to Iraqi Prime Minister Nuri al-Maliki.


U.S. President Barack Obama announced last week that Washington will be “specific strikes” of the armed militants, who control some Iraqi cities, if “this is required


On the other hand, there were conflicting reports from Iraq on the end of the battle for control of a major oil refinery in Baiji, Iraq, amid reports unconfirmed reports that Sunni insurgents have controlled it in the end.


An official in northern Iraq told the BBC that 160 soldiers defending the Baiji refinery and agreed to lay down their arms and leave their positions after mediation by tribal leaders in the region.


But an officer in the Iraqi army, located inside the refinery opposed these reports and said that the militants did not dominate, but the towers near the fence.


The Iraqi military spokesman has said – earlier – that the rebels were forced to leave the place. The refinery has been under siege ten days, with rebels repel attack more than once.


He says BBC correspondent in northern Iraq, said the control of the Baiji refinery is necessary that the rebels wanted to maintain control of the areas where they entered, and provide energy for the connector.

From the Pentagon’s Press Secretary John Kirby:

Clearly someone is lying.

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Legendary Actor Gary Oldman Outs Himself as a “Libertarian”; Also Upset That He Can’t Call Nancy Pelosi the C-Word

Via Reason.com’s movie reviewer
Kurt Loder
comes word that legendary actor Gary Oldman—we
loved him as Sid Vicious, Joe Orton, Lee Harvey Oswald, Dracula
(film and pinball game!), Beethoven (the piano player, not the
clumsy but lovable pooch), Dimmesdale, Sirius Black, Jim Gordon,
and so many more (like the wacked-out drug-dealing wigger Drexl
Spivey in True Romance)
—has outed himself as a
libertarian in
a Playboy interview
. Some quotes culled from that

PLAYBOY: How would you describe your politics?

OLDMAN: I would say that I’m probably a libertarian if I
had to put myself in any category. But you don’t come out and talk
about these things, for obvious reasons.

PLAYBOY: But there are a ton of conservatives in Hollywood,
and libertarians too. Bill Maher has called himself a

OLDMAN: I think he would fail the test. Anyway, unlike Bill
Maher, conservatives in Hollywood don’t have a podium.

PLAYBOY: Fine. We’ll give you one. What would America look
like under President Hillary Clinton?

OLDMAN: What can I say? I feel we need some real
leadership, and it’s nowhere in sight. Look at what’s happening
right now. John Kerry going off to China to talk about North Korea?
What’s that going to do? The ludicrousness of it. What a waste of
money. You’re going to go to the puppeteer and say, “Can you help
me with the puppet?” As far as Hillary, I guess I feel like my
character in The Contender, Shelly Runyon. He doesn’t want
Joan Allen to become president; he just believes she isn’t the
right person for the job. It’s nothing to do with the fact that
she’s a woman, but he uses a bit of dirt on her to bring her

What prompted that particular
exchange? This one:

OLDMAN: More and more, people in this culture are able to
hide behind comedy and satire to say things we can’t ordinarily
say, because it’s all too politically correct.

PLAYBOY: Do you have something in mind?

OLDMAN: Well, if I called Nancy Pelosi a cunt—and I’ll go
one better, a fucking useless cunt—I can’t really say that.
But Bill
 and Jon Stewart can, and nobody’s going to stop them
from working because of it. Bill Maher could call someone a fag and
get away with it. He said to Seth MacFarlane this year, “I thought
you were going to do the Oscars again. Instead they got a lesbian.”
He can say something like that. Is that more or less offensive than
Alec Baldwin saying to someone in the street, “You fag”? I don’t
get it.

PLAYBOY: You see it as a double standard.

OLDMAN: It’s our culture now, absolutely. At the Oscars, if
you didn’t vote for 12 Years a Slaveyou were a racist. You
have to be very careful about what you say. I do have particular
views and opinions that most of this town doesn’t share, but it’s
not like I’m a fascist or a racist. There’s nothing like that in my

Read the whole thing
, which is interesting and profane
throughout. And filled with a lot of old-manism from the
56-year-old who views the future with trepidation and seems
generally and genuinely pissed off about helicopter parents,
political correctness, and, well, just about everything. Also
includes interesting bits on his life as an actor, by the way.

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