Treasury Sells 2 Year Paper At Highest Yield Since May 2011

Moments ago the Treasury sold $32 billion in 2 year paper. Those who have been keeping track of the amazing bear flattening in rates in the past week will probably not be surprised by the result. Everyone else will surely like to know that it just cost the US the most to sell 2 year paper since May of 2011, which at a high yield of 0.469% was the highest yield since May of 2012, or before the great rotation out of stocks and into bond began. And thanks to the “dots” expect to see the yield on short-dated paper to continue rising, even as the long-end drops further in an epic flattening which is sure to crush bank Net Interest Margins. It also explains why nobody talks about it on CNBC any more: after all what is there to say?

Other notables of today’s auction: the Indiect Bid of 40.93% was the highest since November 2012, offset by a tumble in the Dealer Takedown which at 37.53% was the lowest since October of 2012. Perhaps the only good news was that despite the rising yields, or maybe due to, demand at the auction close was solid, with the high yield stopping though the When Issued of 0.477% by about 0.8 bps which was to be expected. If the Fed and Dealers lost control of the front end, it’s all over.


via Zero Hedge Tyler Durden

President Obama Is “More Concerned About A Nuke In Manhattan Than Russia”

Speaking in Holland, after asking for the world’s trust back after being caught red-handed lying about the NSA’s spying, President Obama calmly explained to the open-mouthed press conference that he continues to be “more concerned about a nuclear weapon going off in Manhattan that Russia.” Sleep well New York…



via Zero Hedge Tyler Durden

Nasdaq Biotech Index Re-Plunges To 10-Week Lows

UPDATE: Sure enough the 100DMA was met with buying… for now…


The Nasdaq Biotech index is down 4% from earlier opening highs and is once again testing the 100-day-moving-average that provided some impetus for a modest bounce yesterday. This is a 10-week low level (-14% from Feb highs) and has retraced over 60% of the gains since the Fed announced the taper in December. Volume has been very heavy.


We suspect we will bounce off the 100DMA once again…


but any 3rd break may be the tell that all is not well (as well as the volume below…)


As a gentle reminder this all started when Waxman questioned the bubblicious pricing that bubblicious firms like Gilead are pricing for their new drugs…

Letter to Gilead by zerohedge


via Zero Hedge Tyler Durden

Fed Finds TBTF Banks Increase Systemic Risk, Have A Funding Advantage

For some inane reason, about a year ago, there was a brief – and painfully boring – academic tussle between one group of clueless economists and another group of clueless economists, debating whether Too Big To Fail banks enjoy an implicit or explicit taxpayer subsidy, courtesy of their systematic importance (because apparently the fact that these banks only exist because they are too big in the first place must have been lost on both sets of clueless economists). Naturally, it goes without saying that the Fed, which as even Fisher now admits, has over the past five years, worked solely for the benefit of its banker owners and a few good billionaires, has done everything in its power to subsidize banks as much as possible, which is why this debate was so ridiculous it merited precisely zero electronic ink from anyone who is not a clueless economist. Today, the debate, for what it’s worth, is finally over, when yet another set of clueless economists, those of the NY Fed itself, say clearly and on the record, that TBTF banks indeed do get a subsidy. To wit: ” in fact, the very largest (top-five) nonbank firms also enjoy a funding advantage, but for very large banks it’s significantly larger, suggesting there’s a TBTF funding advantage that’s unique to mega-banks.”

Hopefully this will put this absolutely meaningless and most obtuse “debate” in the dustbin of time-wasting economic discourse, which is virtually all of it, where it belongs.

For those who care, here is some more drivel from the NY Fed:

Until recently, having mega-banks seemed like an unmitigated bad; they create systemic risk and there was little convincing evidence of economies of scale beyond a relatively small size. However, just in the last five years several papers have found scale benefits even for trillion-dollar banks. The first paper in the volume, “Do Big Banks Have Lower Operating Costs?” by Anna Kovner, James Vickery, and Lily Zhou, contributes to that recent literature by showing that bank holding company (BHC) expense ratios (noninterest expense/revenue) are declining in bank size. In a back-of-the-envelope calculation, the authors estimate that limiting BHC assets to 4 percent of GDP, as has been advocated, would increase noninterest expense for the industry by $2 billion to $4 billion per quarter. Breaking up mega-banks is not a free lunch.


The other edge of the sword, of course, is the potential funding advantages and moral hazard associated with being perceived as too big and complex to fail (TBTF). A paper by João Santos, “Evidence from the Bond Market on Banks’ ‘Too-Big-to-Fail’ Subsidy,” adds to the growing literature that tries to quantify the TBTF funding advantage, but Santos adds a twist; he tests whether all very large firms, including nonfinancial firms, enjoy a funding advantage. He finds that, in fact, the very largest (top-five) nonbank firms also enjoy a funding advantage, but for very large banks it’s significantly larger, suggesting there’s a TBTF funding advantage that’s unique to mega-banks.


Along with a funding advantage, being perceived as TBTF may create moral hazard. While it’s almost universally presumed that TBTF banks take excessive risk, recent research challenges that presumption; if the TBTF subsidy increases mega-banks’ franchise value, they may play it safe to conserve that value. In “Do ‘Too-Big-to-Fail’ Banks Take On More Risk?” Gara Afonso, João Santos, and James Traina test the moral hazard hypothesis using Fitch’s government support ratings as a proxy for TBTF status (a support rating reflects a rating agency’s views on the likelihood of government assistance for a systemically important bank). They find that a one-notch increase in support ratings is associated with an 8 percent (relative to average) increase in the impaired loan ratio, consistent with the traditional moral hazard story.


The takeaway from these three papers is that bank size has benefits and costs: The upside is the potential for economies of scale and lower operating costs; the downside is the TBTF problem and the attendant funding advantages and moral hazard.

And Bloomberg’s take, which as a reminder was one of the very “serious” news organization that – correctly – accused the Fed of providing banks with tens of billions in implicit funding subsidies. What other media outlets, or anyone who defended the opposite view, were thinking is simply beyond comprehension.

The largest U.S. banks, including JPMorgan Chase & Co. and Citigroup Inc., can borrow more cheaply in bond markets than smaller rivals, in part because of investor perceptions that they are too big to fail, according to a Federal Reserve Bank of New York researcher. The five largest banks pay on average 0.31 percentage point less on A-rated debt than their smaller peers, according to a paper released today by the Fed district bank based on data from 1985 until 2009.


“This insensitivity of financing costs to risk will encourage too-big-to-fail banks to take on greater risk,” Joao Santos, a vice president at the Fed bank, wrote in his paper. This “will drive the smaller banks that compete with them to also take on additional risk.


The study may reinforce efforts by lawmakers to eradicate the implicit federal subsidy by either breaking up the biggest banks or increasing capital requirements. Large banks have said their advantage has been overstated in studies, including a May 2012 report by the International Monetary Fund estimating their borrowing edge at 0.8 percentage point.


Santos’s report is one of 11 studies resulting from a year-long research project on the U.S. banking system involving about 20 New York Fed staff economists. Fed district banks in Dallas, Minneapolis and Richmond have also published research on too-big-to-fail, or the perception that large banks will be rescued by the government if they get into trouble.


The study also found that the largest banks enjoy a funding-cost advantage over large non-bank financial firms as well as the biggest non-financial corporations.


This finding suggests that “investors believe the largest banks are more likely to be rescued if they get into financial difficulty,” according to Santos. The five largest banks by assets are JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group Inc.


The perception the banks are too big to fail may not be the only reason the big banks can borrow more cheaply, Santos said. “To the extent that the largest banks are better positioned to diversify risk because they offer more products and operate across more businesses (something not fully captured in their credit rating), this wedge could explain part of that difference in the cost of bond financing,” he said.


The New York Fed report says its findings are “pertinent to the ongoing debate on requiring bank-holding companies to raise part of their funding with long-term bonds, particularly if the regulatory changes that were introduced are unable to fully address the too-big-to-fail status of the largest banks.”

Even that wise sage of monetary policy, the Mr.Chairmanwoman, chimed in. Wrongly of course.

Fed Chair Janet Yellen said last month it may be premature to say regulators have eliminated the too-big-to-fail challenge.


“I’m not positive that we can declare, with confidence, that too-big-to-fail has ended until it’s tested in some way,” she testified to the Senate Banking Committee on Feb. 27.

Wait someone said it ended?  As for testing it, how about sending the market plunging by 1% or more? Surely with leverage being where it is, that should be sufficient for the Fed to need to bail out at least a few hundred of America’s most insolvent banks.

Finally, for those who missed it, the sheer idiocy of the Fed spending millions in taxpayer funds to “find” whether TBTF banks are getting implicit taxpayer funds is something only economists are capable of.

The NY Fed’s “research” paper on the topic can be found here, while the NY Fed’s blog on this topic is here.


via Zero Hedge Tyler Durden

The Incompetence Of The Federal Reserve And Deep State Is Unavoidable

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

It's not the managers who are incompetent, it's the organization itself that is incompetent.

I received a number of interesting reader responses to my previous entries on the incompetence of the Federal Reserve and the Deep State:

The Federal Reserve: Masters of the Universe or Trapped Incompetents? (March 21, 2014)

Why Is Our Government (and Deep State) So Incompetent? (March 6, 2014)

Some readers thought I was underestimating the power of these institutions to pursue essentially unlimited money-printing and related global strategies.

While I understand the apparent power of unlimited money-printing and global Empire, my point (poorly articulated the first time around) was this:

The incompetence of these organizations is not a reflection of the competence or intelligence of their managers–it is the intrinsic consequence of their limited control of complex systems. If the system has reached the point of being ungovernable, even the most brilliant and experienced managers will fail because it's not the managers who are incompetent, it's the organization itself that is incompetent.

If we boil down the Fed's vaunted god-like powers, they can be reduced to three levers: lower interest rates by purchasing interest-bearing assets, creating the money to buy the assets, and making free money (zero interest or near-zero interest) available to the global banking sector via lines of credit.

That's it. Everything else is window-dressing.

Is it even plausible that any organization can control an immensely complex economy with three levers? The Fed's three levers exert no control over how much money is borrowed from the Fed or what insanely risky speculations and malinvestments the borrowed money funds.

The Fed can't even control if the free money stays in the U.S.; by one estimate, fully 60% of the Fed's free money has left the U.S. for higher-interest carry trades and speculations in the emerging economies.

The levers of power wielded by the centralized Fed and Deep State are too clumsy and limited to control a complex system at any useful level. The Fed, the Federal government and the deep State are all the wrong unit size.

This excerpt from Preparing for the Twenty-First Century by Paul Kennedy (1993) explains why:

The key autonomous actor in political and international affairs for the past few centuries (the nation-state) appears not just to be losing its control and integrity, but to be the wrong sort of unit to handle the newer circumstances. For some problems, it is too large to operate effectively; for others, it is too small. In consequence there are pressures for the "relocation of authority" both upward and downward, creating structures that might respond better to today's and tomorrow's forces of change.

All these centralized concentrations of power have moved into the diminishing returns phase of the S-Curve. As the unintended consequences of their efforts to manage complex systems with their clumsy, limited tools pile up, their profound failure of imagination kicks in and they do more of what has already failed.

The structural incompetence of centralized, wrong-unit-size agencies and central banks is global: the centralized strategies of China, Japan, the European Union and yes, Russia, too, will all fail for the same reasons: organizations with a few limited controls are intrinsically incapable of managing complex systems.

The Global Status Quo Strategy: Do More of What Has Failed Spectacularly (April 23, 2013)

The Master Narrative Nobody Dares Admit: Centralization Has Failed (June 21, 2012)

"Do you know what amazes me more than anything else? The impotence of force to organize anything." (Napoleon Bonaparte)


via Zero Hedge Tyler Durden

First Russia Locks Up China With “Holy Grail” Gas Deal, Now Rosneft Prepares Mega-Deal With India

Last week we reported that while the West was busy alienating Russia in every diplomatic way possible, without of course exposing its crushing overreliance on Russian energy exports to keep European industries alive, Russia was just as busy cementing its ties with China, in this case courtesy of Europe’s most important company, Gazprom, which is preparing to announce the completion of a “holy grail” natural gas supply deal to Beijing. We also noted the following: “And as if pushing Russia into the warm embrace of the world’s most populous nation was not enough, there is also the second most populated country in the world, India.” Today we learn just how prescient this particular comment also was, when Reuters reported that Rosneft, the world’s top listed oil producer by output, may join forces with Indian state-run Oil and Natural Gas Corp to supply oil to India over the long term, the Russian state-controlled company said on Tuesday.

It said both companies, which work together on Russia’s Sakhalin-1 project, may also join forces in Rosneft’s yet-to-be built liquefied natural gas plant in the far east of Russia to the benefit of Indian consumers of LNG.

We just have one question: will payment for crude and LNG be made in Rubles or Rupees? Because it certainly won’t be in dollars.

Rosneft, which is increasing oil flows to Asia to diversify away from Europe, did not provide any additional details but said it had discussed potential cooperation with Reliance Industries and Indian Oil.

It did not have to: it is quite clear what is going on. While the US is bumbling every possible foreign policy move in Ukraine (and how could it not with John Kerry at the helm), and certainly in the middle east, where it is alienating Israel and Saudi just to get closer to Iran, Russia is aggressively cementing the next, biggest (certainly in terms of population and natural resources), and most important New Normal geopolitical Eurasian axis: China – Russia – India.

There is only one country missing – Germany. Because while diplomatically Germany is ideologically as close to the US as can be, its economy is far more reliant on China and Russia, something the two nations realize all too well.  The second the German industrialists make it clear they are shifting their allegiance to the Eurasian Axis and away from the Group of 6 (ex Germany) most insolvent countries in the world, that will be the moment the days of the current reserve petrocurrency will be numbered.


via Zero Hedge Tyler Durden

Stocks Are Dumping As Biotechs and Momos Resume Drop

Oh the dashed hopes… Just as we warned earlier… the dreams that yesterday was the dip to get back in and ride the waves of central bank largesse to another double in your favorite social media or Biotech stock are fading fast. Today is an almost perecect replay of yesterday’s market action so far… pre-open Gold dump, JPY pump to sustain stocks at highs, spark retail bounce buyers back in and pros sell into strength as the “high growth” momentum stocks and Biotechs all reverse earlier gains in a hurry as all major stock indices are once again red post-Yellen.

From earlier…

everyone is asking: will it be deja vu all over again, and after a solid ramp into 9:30 am, facilitated without doubt by the traditional Yen carry trade, will stocks roll over as first biotech and then all other bubble stocks are whacked? We will find out in just over two hours.



Which leaves all indices red post-FOMC…


USDJPY and stocks doing the deja vu all over again dance…


As “high growth” hope stocks tumble…


And Biotech plunges back to red…


Charts: Bloomberg


via Zero Hedge Tyler Durden

Obama Announces New Plan To End NSA Bulk Data Collection – Live Webcast

The last time Obama announced he would “wind down” the NSA the NSA… got bigger!? Which is why we don’t have any hopes whatsoever that this latest appearance by the teleprompted populist in chief, in which he is expected to announce a proposal to end NSA bulk data collection (yeah right), will lead to any deescalation of the centrally-planned, totalitarian state which has all 20th century dictators spinning in their CIA-facilitated graves. We do expect him to issue more warnings, and explain the “costs” to Putin once again, just in case he missed them the last time, before he annexed Crimea…


via Zero Hedge Tyler Durden

5 Reasons Why Chinese “Stimulus” Hopes Are Overdone

A surprise (to some) drop in China's PMI was just enough bad news to prompt the good-news-seeking BTFD'ers into expectations of additional stimulus from China. Despite 'PBOC advisors' (implictly the mouthpiece of official policy strawmen) stating openly not to expect stimulus and confirming that China will see a "crisis" in local-government financing "but not as expolosive as the 2008 crisis", and that "China must face the moral hazrd issue", investors are buying CNY, copper, Chinese stocks, and practically everything else on the back of hopes for moar money. However, as Bloomberg's Tom Orlik explains, with the government facing conflicting pressures an abrupt about-face in policy is unlikely.


Via Bloomberg Briefs,

1. A significant step toward stimulus would be a step back from reforms intended to control runaway corporate credit and local government debt. Doing so might risk a sharper correction down the road.

2. The State Council’s statement suggests little in the way of new government spending. It promises to accelerate existing projects rather than to start new ones, indicating little additional impetus from the public purse.

3. Similarly, the People’s Bank of China’s recent reintroduction of the 28-day repo at a rate of 4 percent suggests the central bank wants to re-anchor rates at a higher level. At the recent National People’s Congress, PBOC Governor Zhou Xiaochuan said interest rate liberalization is on an accelerated track and is expected to push rates higher.

4. A growing number of analysts expect a cut in the reserve requirement ratio, which would boost bank lending. The reserve requirement ratio is a blunt instrument, and a cut would signal to the markets that the central bank is stepping back from its deleveraging agenda. Finetuning liquidity via open-market operations may be a preferable alternative at this point.

5. In the details of the PMI release, deteriorating output and new orders paint a bleak picture of domestic demand. Rebounding export orders suggest February’s pronounced drop might overstate the weakness of foreign sales. Employment showed signs of stabilizing. Labor markets are a primary focus for China’s policy makers, and that’s another reason to think a wholesale shift to stimulus may not be in the cards.


But apart from that… we must buy because the Central Banks have taught us that is the right thing to do…


via Zero Hedge Tyler Durden