RealtyTrac has reported February foreclosure activity, which at 308,524 units, was a 2% decline from January, and a 6% increase year over year. This equates to one in 418 housing units. And not surprisingly, the snow was once again implicated, this time in painting a falsely positive picture of the economy as “severe winter weather temporarily slowed the processing of foreclosure records in Northeastern and Mid-Atlantic states.” From Jim Saccacio, CEO of RealtyTrac: “The 6 percent year-over-year increase we saw in February was the smallest annual increase we’ve seen since January 2006, when we began calculating year-over-year increases, but it still marked the 50th consecutive month of year-over-year increases in foreclosure activity. This leveling of the foreclosure trend is not necessarily evidence that fewer homeowners are in distress and at risk for foreclosure, but rather that foreclosure prevention programs, legislation and other processing delays are in effect capping monthly foreclosure activity — albeit at a historically high level that will likely continue for an extended period.” In a nutshell, the foreclosure extend and pretend got a snow day holiday in February.

A detail of the various foreclosure activity:

Default notices (Notices of Default and Lis Pendens) were reported on a total of 106,208 U.S. properties during the month, an increase of 3 percent from the previous month but down 3 percent from February 2009. Default notices were down 25 percent from their peak of more than 142,000 in April 2009 but were still more than three times the number they were four years ago in February 2006.

Foreclosure auctions (Notices of Trustee’s Sale and Notices of Sheriff’s Sales) were scheduled for the first time on a total of 123,633 U.S. properties, a decrease of 1 percent from the previous month but still 16 percent higher than the level reported in February 2009. Scheduled auctions were down 14 percent from their peak of more than 144,000 in August 2009 but were also about three times higher than the number reported in February 2006.

Bank repossessions (REOs) were reported on a total of 78,683 U.S. properties during the month, a 10 percent decrease from the previous month but an increase of 6 percent from February 2009. Bank repossessions were down nearly 15 percent from their peak of more than 92,000 in December 2009 but were at nearly twice the level reported in February 2006.

No change among the usual suspects:

Nevada foreclosure activity decreased nearly 7 percent from the previous month and was down 30 percent from February 2009, but the state’s foreclosure rate continued to rank highest in the nation for the 38th month in a row. One in every 102 Nevada housing units received a foreclosure filing during the month — more than four times the national average.

Arizona and Florida documented nearly identical foreclosure rates, with one in every 163 housing units receiving a foreclosure filing in both states. Despite a nearly 21 percent decrease in foreclosure activity from the previous month, Arizona’s rate was statistically slightly higher than Florida’s rate and ranked second highest among the states.

California’s foreclosure rate ranked fourth highest among the states, with one in every 195 housing units receiving a foreclosure filing during the month, and Michigan’s foreclosure rate ranked fifth highest among the states, with one in every 226 housing units receiving a foreclosure filing.

Other states with foreclosure rates among the nation’s 10 highest were Utah (one in every 275 housing units), Idaho (one in 296), Illinois (one in 305), Georgia (one in 331) and Maryland (one in 407).

February showed a divergence at the top, with California improving slightly while Florida deteriorated materially.

The six states with the most foreclosure activity accounted for 61 percent of the national total in February. California led the way, with 68,562 properties receiving a foreclosure filing during the month — down nearly 5 percent from the previous month and down 15 percent from February 2009.

Foreclosure activity in Florida increased nearly 15 percent from the previous month and was up more than 16 percent from February 2009. The state continued to post the nation’s second highest total, with 54,032 properties received a foreclosure filing during the month.

Increasing foreclosure activity boosted Michigan’s total to third highest among the states. A total of 20,028 Michigan properties received a foreclosure filing during the month — up nearly 14 percent from the previous month and up 59 percent from February 2009.

With 17,312 properties receiving a foreclosure filing, Illinois posted the fourth highest total, followed by Arizona, with 16,718 properties receiving a foreclosure filing, and Texas, with 12,638 properties receiving a foreclosure filing in February.

Other states with totals among the 10 highest in the country were Georgia (12,177), Ohio (11,286), Nevada (11,035), and Maryland (5,732).

Full RealtyTrac report.

by Tyler Durden via zero hedge
http://www.zerohedge.com/article/realtytrac-reports-308524-foreclosure-filings-february-2-decline-january-snow-slows-down-for

The Washington Post reports that the next “Lehman-sized” event may be just around the corner, as the European Commission is now supporting a ban on trading sovereign CDS. While we are in process of tracking down whether this is actual news or just some exaggeration based on semantics, we will caution, once again, that the consequences of a CDS trading ban will be severe and very likely result in the opposite of what the EC intends on achieving. Keep in mind that everyone expected the Lehman bankruptcy to be contained as it was at best a fringe cog in the financial system. The result was a systemic collapse as one interlinked component of the financial fabric imploded after another. The rush to unwind CDS positions ahead of a ban will be massive and have unpredictable consequences. But the biggest threat is what happens to bond prices, which once basis trades are made impossible, will be promptly unwound, leading to pervasive selling of the cash leg not by speculators but by plain vanilla mutual fund idiot money. What scapegoaters seem to forget is that the vast majority of existing sovereign CDS notional is tied into perfectly boring insurance “basis” trades, in which the bond is held in combination with associated CDS. Once there is an inability to have hedged cash sovereign exposure, the demand for European sovereign paper will plummet, achieving precisely the opposite of what the CDS ban is attempting to accomplish.

According to the WaPo:

The European Commission said it would back a proposal to restrict trading in a type of financial instrument, known as a credit default swap, that is linked to the prices of government and corporate debt… “Europe and America must say ‘enough is enough’ to those speculators
who only place value on immediate returns, with utter disregard for the
consequences on the larger economic system,” he said. “An ongoing euro
crisis could cause a domino effect, driving up borrowing costs for
other countries with large deficits and causing volatility in bond and
currency rates across the world.”

And far away from financial innovation land, Reuters reports that an approaching hurricane of another round of paralyzing general strikes is about to lead to a drop in Greek GDP that will be worse than even worst-case prior expectations, leaving the rating agencies to scratch their heads what excuse they can use this time to avoid downgrading a flailing Greece:

The Greek economy is set to shrink by more than expected this year,
the government said on Wednesday, as it braced for nationwide strikes
protesting its plans for bringing the country’s budget deficit under
control. Greece, grappling with a
ballooning deficit and a 300 billion euro (272 billion pound) debt
pile, told the European Union that 2010 gross domestic product (GDP)
would “most likely” shrink by more than the 0.3 percent currently
forecast. It also said the drop may
exceed an alternative, more pessimistic, scenario published in Greece’s
Stability and Growth Programme in January envisaging a 0.8 percent
contraction. Economists and ratings agencies
have warned that a sharper than expected slowdown in the economy is one
of the biggest threats to Greece’s commitment to cut its budget deficit
to 2.8 percent of GDP by 2012 from close to 13 percent last year.

So even as ECB is preparing to launch its own rating agency so it can avoid the risk that Moody’s grows a consciences and rates Greece at or about the proper rating of CCC-, just so Greece can pledge its bonds as collateral in perpetuity regardless of how sever its default will ultimately be, it will be tough to place the blame for the next massive round of Greek strikes on CDS traders. And massive it will be. The BBC reports:

Greece is expected to grind to a halt for the
second time in a month as hundreds of thousands of state and private
workers stage a general strike. The stoppage is in protest at the country’s austerity measures. More groups of workers are staging industrial action and officers
from the police, fire and customs services are planning to join the
street protests. Greece’s links to the outside world have been severed. Air
traffic controllers have closed the country’s airspace for 24 hours and
ferries are stuck in harbours as maritime unions join the strike.

The amount of economic output loss daily will be staggering and will have ramifications for 2011 GDP which will certainly come double digits lower than presented in whatever rosy forecasts Greece may have shown to Trichet.

And instead of focusing on how to avoid what may ultimately culminate in civil war, Europe’s fringe countries continue to be caught up in a ridiculous scapegoating and smear campaign that has no basis in reality, and which if pursued through execution, will result in an escalation of economic adversity and lead to yet another Ice-9 event. But that’s what politicians do: they scapegoat. And when one crawls to the very top of the blame-game pyramid, and hits the biggest problem of all - US debt, it will be precisely the same. As Jonathan Weil puts it in his latest brilliant missive: “Someday, should the rest of the world ever begin to question the U.S. government’s creditworthiness, don’t be surprised if the geniuses running our financial system find a way to blame short sellers and speculators for that, too.”

One lesson government officials and CEOs alike should have
learned is that they only undermine market confidence when they
try to deflect attention from their own organizations’ failings
by making preposterous claims or blaming trumped-up bogeymen.
That some of them keep reaching for the same tired playbook
speaks to their capacity for deluding themselves into thinking
that others will believe them when they say ridiculous things.

As Weil so well observes: “This [scapegoating] has a certain mid-2008 ring to it. Back then, in
the months between the U.S. rescues of Bear Stearns Cos. and the
government-backed mortgage financiers Fannie Mae and Freddie
Mac, the talk from Wall Street kingpins and regulators was much
the same.” Are we headed for another systemic failure, only this time with the US already tapped out, our only hope will be for Mars to come and bail out the entire earth. The alternative: global debt repudiation as every country defaults and devalues its currency at the same time. What happens next, nobody knows. 

by Tyler Durden via zero hedge
http://www.zerohedge.com/article/european-commission-back-cds-trading-ban-second-round-strikes-cripples-greece-greek-gdp-now-

Submitted by Credit Trader

Stocks Up BUT Risk Aversion Up

S&P Futures managed to test the Jan 11th highs but risk aversion in credit remains significantly shifted since then which we find intriguing. VIX is slightly higher than at 1/11, 10Y TSY 10bps lower in yield with a notable duration extension into the 5-7Y region of the curve and away from 2Y and 30Y, DXY is up 4.5% but oil is a smidge lower while Gold is -$44. All of these changes as equities reach 2010 highs once again. It is the credit shifts that we find the most notable in the last 42 workdays.

IG is 7bps wider than at 1/11 (with IG intrinsics 13bps wider!). HY is 43bps wider (and intrinsics 39bps) from the closing level on 1/11. Main and ITRX are also notably wider today (9bps and 25bps respectively). In single-names, wideners outpaced tighteners by a huge 6-to-1 and while FINLs outperformed non-FINLs handily in IG names, the majors have seen dramatic curve flattening in that period as well as decompression (remember IG13 has AIG/ILFC and none of the major banks).

As an example, CDR’s Counterparty Risk Index (CRI), which tracks 14 of the largest derivative market makers in the world, has seen a 19bps and 22bps widening in 5Y and 3Y spreads (so an absolute flattening) whch would imply a dramatic rise in forward credit risk premia (think about how much additional interest expense will be drag n bank EPS as TLGP is rolled). However this represents a 35% shift in 3Y risk and 23% shift in 5Y risk with BAC, C, BARC, and RBS flattening the most. ITRX Sen-Sub has decompressed 9bps since 1/11 as ITRX Main ExFINLs has outperformed FINLs by 7bps.

This, perhaps could be explained by sovereign risk, but SovX is actually 3bps tighter today than at 1/11 (4.5% less risky) and while Greece remains 23bps wider than at 1/11, most sovereigns are tighter (except Dubai +55bps). ITRX FINLs underperformed SovX by 17bps since 1/11 (and ITRX exFINLs underperformed by 10bps).

So what? Well the so what is that equities are now back at the highs (seemingly ebullient) but credit remains notably more risk averse (even with the dramatic new issue supply we have had) as it appears that the systemic threat of a sovereign crisis (though now rescinded from sovereign spreads) have left a permanent mark in FINLs and non-FINL corporates. This is interesting as the flattening of the term structures in FINLs and IG (and in 3s5s HY) along with this systemically wider risk premium in credit over equity appears to imply much less satisfaction in fixed income markets than in equity markets.

While a discussion of the fixed income flow vs equity flows and Boomer retirement/dis-saving arguments is a topic for another time, the lack of volume in equity as we raced back up to the 1/11 highs seems to suggest a lack of buy-in that is confirmed by the credit markets inability to reach those swing tights. While technicians will be looking for breakouts, we humbly suggest a more underweight equity vs credit position in the short-term and keeping a close-eye on relative performance (especially given IG13’s outperformance of intrinsics since 1/11).

by Tyler Durden via zero hedge
http://www.zerohedge.com/article/guest-post-stocks-so-risk-aversion

We have now reached a point when a Senator has to write a well-intentioned letter to the very administration he serves, (whose sworn duty is to preserve the wealth of all of its constituents, not just Goldman Sachs), with a cautionary tale that continued lying to the general population combined with a culture of opacity and persistent fraud, will lead to a disastrous effect to the economy and to the very fabric of American society. Alas, in a society in which those being lied to extract a satisfaction as great, if not greater, from this process, than those doing the actual lying, this is not too surprising. Sticking our collective heads in the sand has traditionally worked miracles for resolving the bulk of this nation’s problems. And with the public sector now demonstrating a preferential treatment for the financial space, at the expense of 99% of the remaining population, it has become obvious US citizens can no longer rely on the US government for procuring the truth. Furthermore, with China now a vassal owner of America via its undisputed creditor status, we may soon lose the protection the government is entrusted with affording its citizens in other realms, from enemies certainly domestic (mostly located in south Manhattan), and very possibly foreign. Yet, another voice of caution that has recently emerged, and whose message is critical to all, is that of Pimco’s Mohamed El-Erian. The Pimco executive has written another very relevant Op-Ed in the Financial Times, “How to handle the sovereign debt explosion” which does not so much disclose new things, as capture the essence of the groundbreaking transformation that is currently occurring within the entire “developed” world, and more specifically, the denial that the vast majority of “experts” are exhibiting when faced with a previously unseen process of unprecedented significance.

While we recommend reading the entire article, the following section is of particular note:

We should expect (rather than be surprised by)
damaging recognition lags in both the public and private sectors.
Playbooks are not readily available when it comes to new systemic
themes. This leads many to revert to backward-looking analytical
models, the thrust of which is essentially to assume away the relevance
of the new systemic phenomena.

There is a further complication. Timely recognition
is necessary but not sufficient. It must be followed by the correct
response. Here, history suggests that it is not easy for companies and
governments to overcome the tyranny of backward-looking internal
commitments.

Where does all this leave us? Our sense is that the
importance of the shock to public finances in advanced economies is not
yet sufficiently appreciated and understood. Yet, with time, it will
prove to be highly consequential. The sooner this is recognised, the
greater the probability of being able to stay ahead of the disruptions
rather than be hurt by them.

Precisely the same argument can be brought against Ben Bernanke who in numerous public appearances saw no threat of the bubble bursting in 2005-6, and who, unfathomably, sees no threat of a massive-liquidity bubble explosion currently.

The question we need to ask is shy are we getting this critical insight from a member of the private sector? Why is nobody in government addressing this critical issue and bringing the population’s attention to this most material of systemic patterns. Instead we bicker over the end of civilization as we know it should Goldman collapse (it won’t: it will simply mean that Goldman’s 23,500 staffers will finally have to do an honest day’s work for once in their lives if they want to get paid), or how many quadrillion it will cost for the government to nationalize healthcare, and every other industry. Yes- we should be getting this warning from the Federal Reserve, and from those who hope to become the Fed’s new members - a position which once upon a time was considered an admirable accomplishment yet now puts you roughly in line with the lepers, hookers, wifebeaters and prison rats in the social hierarchy. We should but we don’t - all we get from this government is silence. Instead we get a daily barrage from government bought cheerleaders who preach that all is well, and that precisely the warnings of El-Erian and so many others are to be ignored. And the crowning glory of how far our society has fallen is that the vast majority among us chose to believe these lies, and gladly hand over money to buy another share of Lehman brothers which is in liquidation yet still trades.

And somehow Bernie Madoff is in jail for doing just what the government does to us every single day.

by Tyler Durden via zero hedge
http://www.zerohedge.com/article/pimcos-el-erian-inability-grasp-seismic-changes-currently-occurring-developed-world

It’s 2010: What Should Investors, Traders and More Importantly What Should We as Americans Do Now? Submitted by John Bougearel of The Commodity Trading Advisor

by Tyler Durden via zero hedge
http://www.zerohedge.com/article/guest-post-it%E2%80%99s-2010-what-should-investors-traders-and-more-importantly-what-should-we-ameri

In a letter to Larry Summers and Tim Geithner, Senator Sherrod Brown warns the administration to not simply place more Wall Street cronies in filling the three vacancies at the Federal Reserve, which will open up once Fed vice chairman Donald Kohn leaves this coming June. Instead of mere” maximum liquidity” automatons, Brown wants the new Fed members to be “committed to transparency, consumer protection and lowering the unemployment rate.” Furthermore, Brown demands that “we need economic policy makers who possess
the foresight to identify harmful economic trends, the courage to speak
out about the necessity of addressing these practices before they
inflict lasting damage to our economy, and the wisdom to listen even if
their views are challenged.” Alas, as transparency and rationa thought, coupled with proactive defensive actions means game over for the Fed, these conditions are an immediate deal killer, with the result being that the only affirmative criteria for new Fed membership is the endorsement of Lloyd Blankfein and current Fed Director Jamie Dimon. With the yield curve merely at record wides, there is certainly enough room for the current 2s10s spread of 282 to at least double as the American middle class still has a little money that can be stolen, in space or time, by Wall Street, with the Fed’s endless blessings. Everything else is smoke and mirrors.

Full letter from Senator Brown, via Huffington Post:

March 10, 2010

The Honorable Timothy Geithner
Secretary
United States Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220

The Honorable Lawrence Summers
Director
National Economic Council
The White House
1600 Pennsylvania Avenue, NW
Washington, D.C. 20500

Dear Secretary Geithner and Director Summers,

I write to you today to express my concern about the vacancies at
the Federal Reserve, both on the Federal Open Market Committee (FOMC)
and soon in the Vice Chairman’s office. This is the financial
equivalent of leaving open vacancies on the United States Supreme
Court, and it is essential that we fill these positions.

As Chairman of the Senate Banking Committee’s Subcommittee on
Economic Policy, with jurisdiction over the Federal Reserve System’s
monetary policy functions, I am acutely aware of the importance of
monetary policy at the Fed. Both the full Banking Committee and the
Economic Policy Subcommittee have examined the causes of the financial
crisis and the resulting effects on lending, access to credit, and
employment. The evidence presented to the Committee about the role that
Fed policy decisions played in the financial crisis and the economic
downturn has led me to conclude that the Fed’s monetary policy has
focused almost entirely on controlling inflation rather than maximizing
employment and that the Fed has too often put banks’ soundness ahead of
its other responsibilities. In light of this experience, there are
several other important qualifications that I would urge you to
consider in selecting the new Vice Chairman and new members of the FOMC:

1. Recognition of the causes of the financial crisis before it occurred.

Many economic experts, including some at the Federal Reserve, failed
to anticipate the impending economic crisis. However, there were
exceptional people who sounded alarms about the rapidly inflating
housing bubble, the proliferation of subprime lending, and the
packaging, selling, and investing in toxic financial products by Wall
Street. Unfortunately, regulators, including the Fed, ignored or
attempted to discredit many of these courageous individuals, rather
than heeding their warnings. We need economic policy makers who possess
the foresight to identify harmful economic trends, the courage to speak
out about the necessity of addressing these practices before they
inflict lasting damage to our economy, and the wisdom to listen even if
their views are challenged.

2. Demonstrated dedication to protecting consumers and maximizing employment.

For years, the Federal Reserve’s monetary policy has maintained an
almost single-minded focus on inflation. This has been detrimental to
the Fed’s other core missions, particularly maximizing employment and
protecting consumers. The results of this fixation speak for
themselves. The national unemployment rate is more than double the
Fed’s statutorily mandated 4 percent unemployment target. The Fed also
failed to act on repeated warnings about predatory mortgage lending and
credit card abuses. Consumer protection experience is particularly
important if the new consumer protection entity were to be housed at
the Fed. Our economy will benefit from renewed attention to all of the
Fed’s priorities.

3. Commitment to releasing e-mails related to the Fed’s involvement in the AIG bailout.

A growing number of experts - including economists, academics, and
former regulators - have called upon the Federal Reserve to release all
e-mails, internal accounting documents, and financial models related to
AIG’s collapse. The American taxpayers now hold the majority of AIG
shares, and they have a right to know how their money is being spent.
Providing greater detail about the AIG bailout is particularly
important because that episode continues to taint the Fed’s reputation.
Focusing on candidates committed to full transparency related to this
particular economic event would help to restore the Fed’s stature and
credibility in the eyes of many Americans.

The American public has lost a great deal of confidence in the Federal
Reserve. Selecting a Vice Chair and FOMC members with the above
qualifications will send the message that the Federal Reserve has
learned from the financial crisis, and that the Fed’s weaknesses are
being addressed with more than just cosmetic changes.

I would be happy to discuss specific candidates with you at your
convenience. Thank you for considering my views, and I look forward to
working with you to address these vacancies at the Fed.

Sincerely,

Sherrod Brown
United States Senator

by Tyler Durden via zero hedge
http://www.zerohedge.com/article/senator-brown-warns-summers-and-geithner-not-fill-fed-vacancies-yet-more-administration-pupp

Over the past few months, Arianna Huffington has initiated a grass roots campaign called “Move your money” whose purpose is to forcefully shift an allocation of the deposit base from the TBTFs which have captured the government via the Wall Street-D.C. lobby complex. While we hope this campaign succeeds, we are somewhat skeptical that it will achieve its goal. First, the logistics of transferring one’s account are non-trivial and can be daunting to most people. Second, the overarching problem lies not so much with the banks themselves, as with the one supreme enabler of not just artificial “profitability engineering” but of the broad range of market interventions, which will ultimately result in the collapse of America. Just today we demonstrated that the US monthly budget deficit hit an all time record, which, paradoxically, and completely counter-intuitively was accompanied by a record drop in the interest rate paid on public marketable debt. This is an artificial and perverted relationship which will soon breaks, and when it does the suffering will truly begin. Yet therein lies the rub: as the Administration, with the full complicity of the Treasury, borrows deeper into the red and consigns America’s future to a 3rd world fate, can now only be stopped by precipitating a full systematic reset of a Treasury-Fed duopoly set on testing whether or not America can default. Unfortunately, the guinea pigs in this experiment are some 300+ million Americans. We suggest a simpler solution to facilitate this the much needed reset: increase your tax withholding exemptions (a far simpler process to moving one’s deposit account), thereby forcing the treasury to tip its hand on just how much debt it will need, as it pretends to have some semblance of authority over an out of control budgetary situation.

This is a perfectly legal practice: here is the IRS itself providing a useful primer on how taxpayers can bump up their withholding exemptions all the way up to 10, in this way forcing the Treasury to delay receipt of tax funds via paycheck withholdings well into the post April 15^th future. We are confident that the capital reallocation that the banks will experience as a result of “Move your money”, coupled with the need to run a much more balanced budget (which we now realize is impossible, and the only alternative is eventual sovereign default or complete dollar devaluation) once tax withholdings dwindle, will finally force this administration and the banking cartel to listen to the silent majority of 95%+ Americans which are not on the list of burgeoning millionaires, and who couldn’t care less if the market shot up 100% today on some algo gone wild, yet which is somehow supposed to indicate that the economy is getting better. Just look at today’s record budget deficit number to make your own determination just how much “better” the economy is getting.

by Tyler Durden via zero hedge
http://www.zerohedge.com/article/modest-amendment-proposal-move-your-money-campaign-increase-your-withholding-exemptions

The 10 Year Treasury To Mortgage spread just broke the 60 bps barrier, and is now trading at a record tight 59.61 bps, after dropping as low as 58 bps earlier. Is the Fed now launching a short squeeze in MBS as well? Pretty soon Mortgages will be trading at negative rates, when the Fed realizes that the only way to get house prices higher is to pay Americans to take out a mortgage.

by Tyler Durden via zero hedge
http://www.zerohedge.com/article/another-record-treasury-mortgage-spread-just-took-out-60-bps-support

What is wrong with this picture: the MTS just announced that the February budget deficit was $220.9 billion, after receipts of just $107.5 billion with vastly surpassed by outlays of $328.4 billion. This is a record. Yet the interest on the public debt was a mere $16.9 billion (page 13 of the MTS report). The reason for this is because as TreasuryDirect points out, in February the interest on public marketable debt (actual cash outlays), which as of Monday stood at $8.061 trillion, hit an all time low of 2.548%. How is it possible that unprecedented debt accumulation can result in ever declining interest rates, and Treasury auctions, such as today’s 10 Year reopening, in which the Bid To Cover hit an all time high? One answer: The Federal Reserve, which through complete domination of the entire capital market courtesy of ZIRP and QE has now turned market logic upside down by 180 degrees. In a normal world, the more money you borrow, the greater the associated risk, and the greater the interest payments on this debt. Not in America though. So can we assume that the Fed can forever keep rates on debt at record low levels? No. Which begs the question: what happens when interest rates do finally start going up?

Here is the relevant page highlighting the deficit. In a word: the US collects enough money organically (via taxes) to cover less than a third of its outlays.

A look at the distribution of receipt components should lead to questions about the sanity of anyone who claims that the budget trajectory is sustainable - in a word, tax revenues are plunging. Of course, this has to be evaluated in parallel with the observation that tax refunds in January and February of 2010 have actually surpassed those of 2009 as Zero Hedge discussed previously, explaining why consumers have shown abnormal resilience so far in 2010.

So even as the income side of the Federal ledger has rarely if ever been quite as bad, the expenditure side has exploded, and not as a function of debt funding: the bulk of outlays have to do with entitlement programs which came in over $160 billion, and which still could not have been covered organically.

Here is where debt comes in. We know that recently the debt ceiling was raised to $14.3 trillion which is expected to be hit in less than a year. Observant readers will recall that the previous ceiling of $12.4 trillion was supposed to last the US until the end of March - well, not only was this number passed over a week ago, it is now, less than half way into March at $12.5 trillion, which would have broken the debt ceiling far in advance of expectations. This leads us to believe that the $14.3 trillion ceiling will likely have to be raised once again and at a very critical time for the administration: around mid-term election time.

Yet if one were looking just at the interest rate paid by the government on the marketable debt portion of the public debt (which was $8.06 trillion as of most recently), it would appear that America’s economy was cranking on all cylinders. Of course, this is not the case, and the rate is merely an indication of the Fed’s direct intervention in all possible markets.

The chart below shows the absolute level of the interest on marketable debt, and the MoM % change. In February the rate came in at a record low 2.548%, a 1.8% decline from the 2.595% in March.

To be sure, this is expected with the Fed running a Zero Interest Rate Policy, and QE adding direct purchases by the Fed.

Yet what is notable is that even with the effective Fed Funds rate at zero for over a year, the rate on marketable debt has bottomed out, and the spread from FF to the Interest Rate has held constant at about 2.5%.

The primary reason for this is the duration distribution of US debt. The short-term portion has already reaped the benefits of issuance at or near 0%, while the longer-dated side of the curve is keeping rates higher. If indeed the Treasury is serious about extending the average maturity on public debt from 4 to 6 years, the new baseline for this spread will eventually be at about 3%, where it was earlier in the decade. 

Yet the logical next question is what happens when rates start going up? It was as recently as September 2007 that we had a interest rate on marketable debt of nearly 5%. The plunge to 2.5% took just over a year. Even the mere mention of actual tightening will spring rates right back to 5%. What does that mean for actual outlays. Well: if indeed we are correct that total debt will hit $14.3 trillion in less than a year, it means the marketable debt will be about $10 trillion, and the incremental 250 bps of interest will mean about $250 billion of additional interest outlays a year, or half a trillion annually. That comes to about $42 billion a month. In January this amount would have been double the net withheld income taxes.

It becomes obvious why the Fed simply can not allow rates to go up. It has nothing to do with excess liquidity, which of course is a major concern as America goes from one excess-liquidity bubble to another. The problem is that the surging budget, which will need ridiculous amounts of debt for funding, will truly explode if rates were to go up merely to 5%. What happens if rates hit 7.5%… or 10%? At that point it is game over. And that sad ending will occur once the Fed and the administration realize that all ongoing efforts to kick start a consumption driven economy will fail. In the meantime, the economy will slowly grind to a halt as the servicing of public debt takes over a greater and greater portion of all tax receipts, until all taxpayer money is used merely to cover the interest expense. At that point buying CDS on the US denominated in euros, dollars, gold, .556, watermelons, or what have you, will be completely pointless as the bankruptcy of the US will be entirely priced in.

by Tyler Durden via zero hedge
http://www.zerohedge.com/article/budget-deficit-hits-record-high-interest-us-public-debt-hits-record-low

Submitted by Nic Lenoir of ICAP

The recovery has been uneven around the globe. The US with heavy stimulus has returned rapidly to positive growth (whether we can sustain it is a completely different debate), Swiss real estate was never really affected by the quasi worldwide slide and GDP in Switzerland is expected to be between 1% and 1.5% for 2010, and Canada has not only returned to positive growth but it also has to consider slowing down a bubbly real estate market. Meanwhile Europe’s leading rebounder Germany is not guarantied to post positive GDP for Q1, Greece is wondering whether debt refinancing and what it will take will lead to civil war, Spain’s industrial output is still approximately 30% off of what it was in late 2007, and Japan is discussing extending QE. The least we can say is that the bottoming process is rather uneven based on where you live, and with rates at near 0% everywhere or almost, we look at what relative value opportunities may present themselves as central banks debate how to transition from QE to more “normalized” liquidity environment and finally towards higher rates.

The Fed has constrained itself by stressing the 4 to 6 months meaning of “extended period of time”. Some in fact view it as a moral hazard because it takes away some flexibility in the Fed’s ability to respond to the data should it surprise significantly to the upside. As liquidity is starting to be withdrawn the need for the language and the constraints that come with it are starting to balance each other. While we have not necessarily heard enough from the Fed to believe a change in the statement is coming up necessarily next week, should it happen the sell-off in reds and EDZ0 should be brutal. If this is not the case, I expect the Fed to be at least a lot more vocal in stressing liquidity withdrawal and give details about upcoming operations. The carry remains pretty steep (58bps rolling EDZ0 to EDH0) but policy risk to longs is starting to build up.

The BOC has historically rarely started hiking before the Fed. At the same time, the BAZ0/EDZ0 which was just under 20bps to start the year is now at 60bps. So if history repeats itself and the BOC waits for the Fed to draw first, the spread is probably a bit rich here. I am not sure whether the BOC has the luxury to wait for the Fed, but USDCAD in the lower end of the range between 1.02 and 1.03 is also certain to lead to caution as a strong CAD is not at the top of the BOC’c wishlist. So the Dec BED spread is slightly rich or at best fairly priced we feel.

The SNB has been at the center of many talks in the last few days and it is believed that in the current more risk prone environment the appreciation of the CHF against EUR and USD has been more controlled which may give Switzerland the room to maneuver it needed to consider hikes. Here again outright plays other than for June are carry-expensive and some worry that the overall poor environment in Europe will also make the SNB more hesitant. A relative value play could be to buy ESZ0/ESH1 as a spread against selling ERZ0/ERH1 as a spread. The liquidity normalization in Europe is keeping the Euribor curve relatively steep in the front-end, but at the same time hikes are completely out of the picture. Selling ERZ0/ERH1 rather than buying Euribors outright isolate the liquidity normalization risk while allowing to take a view on a stronger economic environment in Switzerland. (See ERES Z0H1 Chart)

The economic picture in Europe is so obviously bad that rates are completely out of the picture. The ECB is historically a solid year beinh the Fed anyways as the US economy enters faster in recession but also comes out of it a lot faster. However, if the carry to ERZ0 still seems attractive being north of 50bps, a lot of it stems from the expectation of liquidity normalization which would bring Eonia back in line with the 1% target rate. The fact that ERZ0/Z1 is in th mid 80s and EDZ0/Z1 above 140 is already factoring a more aggresive Fed. Still by historical standards more could easily be priced in. We looked at buying EDZ0/H1 against ERZ0/H1 and found that even tough the market could well price more, the box trades already +14bps, so it is a relatively consequent negative carry. Until policy starts physically changing, fighting carry can be a very expensive hobby, so we prefer the SNB/ECB play mentioned earlier when it comes to fading ECB hikes.

The Bank of England has a tough task ahead, but not as tough as fixing the budget gap is. England seems to have the will compared to other countries to balance the budget to avoid a refinancing crisis like what is happening in Greece (claims that the crisis is over today by the way or not only ludicrous but also moronic as there is a huge tranche of refinancing coming up in April and May, and only successful issuance will allow politicians to claim victory). As long as those issues aren’t addressed, and the consequences of the austerity required on the economy are evaluated, an extension of QE could well be more likely than talks of hikes. This is why we view a relative value play between ED and short sterling as the best way to express the economic outperformance of North America over Europe. The chart shows that buying EDZ0/H1 against L Z0/H1 allows us to express the view without barely any carry, we would buy the spread around -2/-3 in order to play +10/+15. For those who prefer using options, this morning we priced that selling the EDZ0 99.50 calls to buy the L Z0 99.125 calls could be done receiving 3bps for the structure. If both markets sell-off a gain of 3bps is realized, and the only real downside scenario would be a case where the Fed is on hold through 2010 and the BOE hikes. We view this scenario as very unlikely.

The last central Bank we want to quickly mention is the Bank of Japan. Most market participants expect the BOJ to extend QE and continue to pump liquidity into the system in a desperate 20 year in the making attempt at creating inflation. Whether they succeed or not, it should undermine the vlaue of the JPY. As I have stressed out on many occasions I believe USDJPY is grossly mispriced. The trade is hard to keep on because of risk aversion flight to JPY which can be rather painful, but if one aligns market timing with fundamentals it is a good trade to play from the long side. Watch closely a break past the 91.50 and 92.80 resistances which would confirm an exit outside of the bearish channel and lead to a strong move upward.

Good luck trading,

Nic

by Tyler Durden via zero hedge
http://www.zerohedge.com/article/fed-boe-ecb-boj-snb-boc-who-will-blink-first