Bond Market Gap-Down

A sudden gap-down happened this week in the bond market. The Wall St. Journal maintains this was primarily due to bond market players jumping from the treasuries to the corporates.

Corporate bond markets are probably more solvent than the sovereigns, save that central banks can print money to buy bonds out of market to ensure that a financial collapse does not occur in this sector.

source: http://quotes.ino.com/chart/?s=CBOT_ZB.H12.E

• JANUARY 4, 2012, 4:08 P.M. ET

Treasury Bonds Stung By Corporate Debt Sales

--Bonds flip to losses, but 10-yr yield stays below 2%

--10-year yield seen in tight range of 1.8%-2.2%

--Investors most bearish on Treasurys since August--JPM poll

--Euro-zone concerns muffle rise in Treasury yields

 
   By Min Zeng 
   Of DOW JONES NEWSWIRES 
 

NEW YORK (Dow Jones)--A flight-to-safety rally in the Treasury market on Wednesday caved in to selling pressure linked to brisk corporate debt sales, pushing down bond prices for a second straight session.

A number of companies including General Electric Capital Corp. and MetLife Global Funding took advantage of historically low interest rates to raise cash at the start of a new year.

Selling Treasurys is a typical strategy to hedge unwanted price swings. Once new corporate bonds are priced, usually in the late afternoon, the hedges are unwound by buying back Treasurys.

For now, such selling overwhelmed safe-haven flows due to the euro zone's unresolved sovereign-debt crisis. A brief lull from buying by the Federal Reserve also removed a supportive force. The central bank is scheduled on Friday to buy long-dated Treasury bonds.

Wall St. Journal

Note that the gap-down was not filled in several days' trading. The bond market auction will probably be a key to bond pricing in the new year, though its highly likely that the Fed will intervene with massive purchases, or that a new QE 3 will be announced if bond markets sell off.

Note that on the day bond markets gapped down, GBN.V shares performed by rallying. The gap might actually be filled going into next week depending on the results of the bond auction, GBN.V shares will dip if this happens.

$USB Monthly

I have maintained that bond markets take precedence, as is natural, especially over insolvent companies. GBN.V is not technically insolvent as it stands, but has not fullfilled its 'plan of arrangement' with its shareholders, the principal lenders to the company.

It is therefore technically in default, though it has no debt and no outside encumbrances. The company management does not recognize that, despite being a gold producer, they are in matter of fact operating in competition with arbitrageurs who first sell the shares without owning them and then parry against the rising trend in the bond markets. This is who they're competing against, not other gold producers.

The arbitrageurs, who sit at trading desks in commercial trading sections within the banks, first sell the shares in the millions, raise the capital, and then leverage up heavily when they bet on futures in the long treasuries. In all likelihood they do not own any shares whatsoever before first selling them. The capital they raise is the bank's capital, and not theirs, and considered to be borrowed money.

That means they are obliged to buy these shares back, and they do so when the share price becomes depressed. Exactly the same way that ETFs were valued in the hundreds of dollars per unit during a price correction in the gold & silver market, arbitrageurs do not see GBN.V as a surviving company, thus they place an immense emphasis on the stock price decline, despite the fundamentals.

But should GBN.V pose a value proposition to the market and buyers start snapping up the shares at market, very likely the commercial trading desks will have a trump card to defend their capital interest in a proposed hostile takeover and carry a majority interest in the company through their contractual obligations, as they sold i.o.u.s instead of shares to shareholders. This does not automatically mean that shareholders will get the best price, nor does it mean that the buyer will be a motivated buyer. THEY have the voting righs NOT YOU.

I presume this is the reason that Aurelian sold so rapidly against the shareholder's wishes to a major gold company and why the same major gold company was probably obliged to buy out a certain company at 60 P/E. The banks are firmly in control here, protecting their capital interest, whenever something totally illogical occurs. This would underline the need to vote your preference in favour of the board whenever possible, regardless of your injured feelings about dilution.

But one thing they cannot prevent is for GBN.V to pay out a dividend. This is one thing they could never forsee, and that shareholders aught to be appraised that GBN.V CAN pay this out in non-compliance to the slavish deference to arbitrageurs capital interests existing within the markets. The result will be a share price with very limited advances, but that the returns go to the shareholders, not the banks.

GBN.V has been under the bond market's thumb since a couple of decades, and I cite the long term bond price chart as the best example. The company management simply must WAKE TFU on this issue, and stop dreaming in technicolor about key developments at least a decade off. The gold price WILL SUPPORT THIS EVENTALITY, BUT THEY MUST TAKE CARE OF THEIR SHAREHOLDER'S INTERESTS AS A PRIORITY. As is the natural order of priorities, since there are no bond holders in the company.

Note that there is a sizeable gap that need filling in the 126 - 127 area.

supersize: http://www.flickr.com/photos/11747277@N07/6643531185/sizes/l/in/photostream/

stockcharts.com

News releases that might actually produce a rally are as follows:

- a treasury bond sell-off.

- an increase in mill utilization.

- an improvement in the rates of recovery

- an improvement the ore dilution rate

- hiring of a new COO.

-F6