The End

Well, it's over. My time on the beach as a blogger has come to an end. I've decided to re-join the ranks of the gainfully employed and I'm pretty confident my new compliance department will not take kindly to my predilection for blogging.

So, thank you all very much for actually reading it and thereby forcing me to think hard about the credit markets on a daily basis.

Keep up the vigilant curiosity, avoid bland certainty and aspire to regular critical self reflection.

Daily Commentary

Spreads are tighter this morning following China's big equity move and an 'as expected' ECB leaving rates unchanged. Secondary volumes are actually about normal while the new issue calendar is fairly light. We did see >$4B in issuance yesterday; the bulk of which was a series of issues from Westpac. So far, no new issues in the queue and I'd be surprised if we saw much ahead of tomorrow's US payroll number. I am encouraged by the recent steepening in the credit curves. It may be solely in reaction to the flattening of the underlying US Treasury curve but it's a healthy sign nonetheless.

Please note that the main credit index is about to roll. The new constituents for CDX #13 have been chosen and it will start to trade on September 21st. Initial analysis has the new index trading ~16bps tighter than the current one.

I was a bit surprised to see S&P putting >$5B in corporate loan CDO's on creditwatch negative; perhaps I was a bit naive in my belief that the worst had passed us by.

Warren Buffet seems to believe that the worst has past in the mortgage market as evidenced by his recent purchase of Capmark's mortgage unit. Spreads in BRK paper did not react much at all.

While the ECB remains unchanged, the FOMC has "considerable uncertainty" about the strength of the economy (minutes here). This leads me to wonder why Fed governor Plosser was on the tape predicting that rates will have to rise "very rapidly".....he did, however, add a codicil of "if the time is right."

While I'm generally pretty dismissive of most financial tort lawsuits (being a believer in 'caveat emptor'), this recent suit has some interesting tenets. The rating agencies are claiming their opinions are protected under "free speech". Well, this particular judge does not believe that defense is adequate and is allowing a class action lawsuit to proceed against them. Here's the Bloomberg story.

If you can survive the first few paragraphs about golf, Bill Gross does eventually get to what he believes is the 'new normal' for the financial markets in his recent monthly outlook.

Here's some more interesting Labor Day weekend reading....in which the SEC rails at the SEC for not catching Madoff...even Madoff himself was surprised he didn't get caught.

Daily Commentary

Spreads are still slightly weaker despite a higher ISM Manufacturing number. We certainly feel rangebound in this last summer week. Yesterday's month end (daily) volume was very low versus previous month ends.

Market participants all seem to be awaiting the determining factor of September supply. As JPMorgan notes, supply could be heavy given attractive all-in yields for the issuers and impending October earnings blackout. Countering that are the already high cash on balance sheet levels and moribund capex spending. Plains All American Pipeline is the only new issue queued up this morning.

Here's a marketing piece from PIMCO where one of their portfolio managers notes their concerns about declining recovery values in credit (via Blooomberg news).

The volume of stories about current or pending CMBS defaults seem to be approaching a crescendo. Here's the latest from Bloomberg news.

AIG credit is getting whacked just as badly as the equity post Bernstein downgrade and lawsuit dismissal.

Those traders at RBS really stayed glued to their desks don't they.....oh wait, those are protesters who have glued themselves to the desk. (via FT/Alphaville)

Daily Commentary

Weaker global equities have credit spreads following suit. Secondary volume was very very light on Friday and once we get past today's month-end activity, I suspect the rest of this pre-Labor Day week will be light as well. Only one new issue, from Republic Service Group, is in the market today.

M&A is definitely back as 2 deals were announced today. Disney buying Marvel and Baker Hughes buying BJ Services. BHI spreads are ~7-10bps wider on the news and they made a comment on the conference call that if the bond market stays where it is, they'll term out the debt (i.e. it's really attractive for us to fund now). DIS spreads were only a few basis points wider in line with the broader market.

Radio Shack is following the trend of deleveraging and tendering for 1 of it's outstanding bonds at above market prices. To give you equity folks a feel for corporate bond trading, these particular bonds only traded once during June, once during July and once during August in non odd lot size. As one could extrapolate, this throws quite a wrench into the works for those that had bought protection on RSH in the credit default swap market (i.e. a short squeeze).

Speaking of credit default swaps, I've mentioned more than once the existence of an oligarchy that profits quite handsomely from this market. Here is a Bloomberg story about their efforts to lobby against regulation and change.

I've recently noted the potential harmful impact on the banks of the pending accounting rule change with regard to securitized assets. Apparently, the FDIC also recognizes this and is now proposing a phase-in as opposed to a Big Bang.

Yes, this is slightly old news but Bloomberg has a good piece about the leverage at the banks picking up. Speaking of banks growing....here's a Washington Post piece (via The Atlantic) about those banks that were 'too big to fail'...and are now bigger.

Post a failed LBO, there's often loads of sour grapes whining. Here's a piece in BreakingViews about Tribune bondholders claiming fraudulent conveyance.

I missed this piece last week in FT/Alphaville which was a commentary from PIMCO's El-Erian regarding a 'to-do list' for Bernanke for his second term.

Fortune magazine has a longer article about Chris Flowers and the loss of his Midas touch.

Daily Commentary

Spreads are meandering slightly tighter this morning following equities. While I acknowledge it is a summer Friday, I'm surprised that secondary volumes are so light given the impending month end. No new US issues are on tap so far today. Looking at the JPMorgan credit index, the current yield is 5.45% and the average bond price is $105.24.

I'd think the credit markets would have been more encouraged by AIG's new CEO saying that he would be patient with his asset sales. A prudent seller helps all markets...AIG CDS is slightly weaker on the day however.

It's rare to find an enormous disparity between the credit views of the two major ratings agencies Moody's and S&P. Thus today's Reuters story highlighting their current wildly different beliefs about high yield default rates makes for interesting reading.

Recently I noted that Israel was the first central bank in this cycle to hike rates. Contrast this with Sweden which recently cut rates below zero (story here).

Clearly I should not delve too far into global macroeconomic theory given that this story surprised me a bit....the Economist maintains that a country's investment returns are not correlated with it's GDP growth.

While some companies would prefer to avoid their regulators at all costs, others feel it benefits them to be close or friendly. This approach, from disgraced financier Allen Stanford, is taking the latter to a creepy extreme.

Daily Commentary

Spreads are largely unchanged this morning in light volume. On the new issue front, only 1 deal from Praxair seems to be queued up. The recent P&G benchmark deal, which can be used as proxy for the health of the new issue market, remains a few basis points tighter than where it was issued. While secondary volume is off a bit, the breadth of the market remains healthy.

JPMorgan credit research recently noted that EBITDA margins in Q2 were actually above the average of the last decade.

Diageo's CEO was on the tape this morning making comments about his eagerness to make acquisitions; spreads in Diageo CDS were about 5bps wider to the low 70bps area. I note this as it's been quite some time since I've seen any M&A chatter affecting spreads.

The long awaited FDIC rules (39 pages of them) regarding private equity firms buying failed banks have been released (here). As expected, the capital requirement was lowered from the proposed 15% to a more palatable 10%. However, this Reuters Blog astutely notes that it's no longer pure Tier 1 capital (reserve) but rather Tier 1 Common Equity.

Fed governor Lacker made comments (here) that concluded with his intention to revisit whether the Fed should complete it's entire targetted purchase of $1.25T of mortgage backed securities. This is likely to raise many eyebrows amongst the mortgage crowd. In theory, most investors disapprove of any government intervention in the markets....while in practice, everyone privately likes it when the government artificially inflates the price of securities you own.

Given the lack of credit focused news items to write about this morning, I'll delve into mortgages for the second time today. The NYTimes has an article about the enormity of pending mortgage rate resets coming in the next few years that could easily threaten any real estate recovery. BusinessInsider's Henry Blodget also has some graphs on the same matter (here).

Buttonwood from The Economist has a short posting here about the debate whether private equity owned firms outperform public firms.

Daily Commentary

The market is suprisingly resilient for a late August day. Spreads are unchanged to slightly wider but secondary volume and breadth are quite healthy. I would like to reiterate, however, that credit spreads have definitely lagged the rally in the S&P since early July.

The new issue market is performing well with a large issue yesterday from P&G (which is slightly tighter in the secondary) and new issues today from Westfield Group and Roper Industries. Roper is barely investment grade rated yet the deal is several times oversubscribed.

Zerohedge has posted a copy of a letter to the SEC attributing blame for the money market fund problems clearly on the rating agencies. While this in itself is no shocker, the fact that the author of the letter runs a rating agency himself is unusual...as you can imagine, he largely points the finger at his competitors.

Looking at the DTCC data, I did notice one data point that was out of line with much longer term trends. Gross index outstanding has actually picked up for the first time in a long time; growing liquidity in that index bodes well for the market. Before the credit crisis, you could easily do a $2B trade, on the wire, with little impact to the market. During Q1, that liquidity dropped to $25-50mm but has gradually crept back up to $500mm-$750mm size markets.

This slightly dated article from the NYTimes draws some comparisons between GE and Enron with regard to their earnings management (aka manipulation). It quickly reminded me of one of my favorite contrarian articles of all times from Malcolm Gladwell in the New Yorker (here). In it, he argues that all of Enron's financial information was publicly available for those willing to solve a very very complex puzzle.

Commercial real estate is still struggling. However, some may point to the recent drop in delinquencies (the first since August 2008). Realpoint Research (via FT Alphaville) notes that it's simply a technical due to a large amount of GGP backed loans temporarily returning to 'currently paying' due to modifications.

Daily Commentary

Credit spreads are largely unchanged this morning in advance of a slew of real estate data. Case/Shiller for June was slightly better than expected while we are still waiting on FHFA for June and new home sales for July.

While we're only seeing 1 small deal from DUK in the US investment grade market today, Europe is witnessing 2 very interesting offers from Banco Santander. Their first offer is to buy back securitized product that they issued at slightly discounted prices (details here). This is certain to help liquidity in their ABS market as investors jockey positions to take advantage of this. Their second offer is an exchange similar to what Viacom did recently. They are offering to buy back several of their off-the-run existing issues at a discount in return for new benchmark sized bonds. These are both signs of healthy and growing liquidity.

More than once you've heard me note the wide spreads and lack of liquidity in the REIT sector. CreditSights has published a relatively bullish fundamental piece this morning noting that REITs are "no longer focused on last resort measures of bolstering liquidity" and they have sufficient cash or credit to meet maturities through 2012.

Quick pop quiz....are any central banks raising rates? Yes, Israel did this morning from .50% to .75% .

While this certainly shouldn't come as a surprise, apparently the FDIC will ease their rules that had precluded private equity firms from buying banks.

To those that howled in protest over the government bailout of Citi, I will now respond "should we taxpayers keep the $11B we've made so far?" (story here)

While some may express surprise that Goldman, or any other firm, allegedly gave their opinions to certain clients but not all, I am not. Let's be realistic here.....in ANY industry, clients that provide the largest revenue streams get the best service. If you spend big bucks at an airline, you get the best food, best flight attendants and comfortable big seats. If you spend loads of dough at Saks Fifth Avenue, you get a personal shopper and an early look at the Tory Burch Spring collection. No one should be surprised or offended by this gradation....remember, they are opinions and only that.

Daily Commentary

Credit spreads are slightly better this morning as they blindly follow equities. Equities were obviously buoyed by Bernanke saying that the "prospects for growth in the near term were good."

We've seen four straight weeks of declining secondary volumes and this week is unlikely to break that trend. In addition, so far today only 1 smaller issue from Westpac has been announced.

There's likely to be little on the docket this week to drive spreads with the possible exception of the US Treasury auctions of 2 year, 5 year and 7 year bonds. I don't think the folks at treasury are thrilled with the timing of PIMCO's McCulley saying on Bloomberg radio this morning that the "big gains to be made in our lifetime in treasury bonds have been made." (more here).

FT Alphaville pointed out the ECB's lending survey data which shows that lending standards have eased back to the level of mid 2007.

If you're headed to the beach and would like some light reading, here are Bernanke's "Reflections on a Year of Crisis." from the recent central banker boondoggle in Jackson Hole.

The WSJ made reference to a recent S&P report that asserted 75% of all fixed income funds, including 98% of mortgage funds, have underperformed their benchmarks. While this ex-active buysider is certainly biased, the underlying indices in fixed income are very difficult to virtually impossible to actually replicate in the markets.

Existing home sales in the US were well above estimates driving stocks higher which in turn has credit spreads doing better this morning. While many are citing (whining?) about volatility in spreads being exacerbated by low secondary volume, the TRACE data shows that it's down only slightly. That being said, the tech/media/telecom names do seem to be gapping tighter on few actual trades.

Half of the recent mutual fund flow data was a continuation of recent trends; positive flows into high grade bond funds and outflows out of money market funds. However, it was a bit of a surprise to see both high yield bond and equity funds have outflows.

Earlier this week, I mentioned how a FAS ruling about off balance sheet securitization (being reversed) may hurt the banks. Apparently the FDIC is quite concerned about the impact as well...."the timing gives me heartburn" said their chief here.

Earlier this month, I had a post about prime mortgage borrowers defaulting at a higher rate than sub-prime borrowers. Here's more on that alarming trend from the Mortgage Bankers Association (tip from FT Alphaville).

Apparently, mom and pop can now 'hedge' (or speculate on) their real estate risk. Read about it in this Economist article.

The fact that corporate treasurers are being conservative with their balance sheets right now should not surprise anyone. This WSJ article will add some more data points to the argument.

The Vix has now had 7 days of opening up higher and closing lower....today's open was lower however. So much for my prediction that a base was forming....

Zerohedge points out that Goldman CDS has widened from ~100bps to ~150bps during August while the stock is about unchanged over the same time frame. Looking at a broader 3 month regression tells the same story (stock 'should be' lower or the CDS tighter) but with a weak R squared (~.51).

Spreads are holding firm this morning on this very light news flow day.

Yesterday's new issue from Viacom saw a slight upsize due to demand; the 10 year bonds are trading this morning about flat to where they were issued yet the 5 year bond is trading about 10bps through issue spread.

Stealing a page book from Rahm "Never let a crisis go to waste" Emanuel, the CFTC is making a move to 'enhance' the current derivatives regulation proposal. This occurred despite Geithner's urging of agency heads to stop campaigning for changes.

While I have been concerned about the Vix's attempt at a move higher, it seems that the last 6 days have seen the index move higher on the open but close lower on the day.

Given the lack of other things to write about, I've perused the most recent DTCC data on credit default swaps. The only thing that caught my attention was a healthy spike in the amount of swaps referencing Credit Suisse (granted it was off a relatively small base).

While it is clearly dull as dishwater, I'd like to keep people's attention on the debate over mark-to-market accounting. The most recent salvo comes from Nobel prize laureate Robert Merton (and others) supporting the use of mark-to-market (aka fair value).

This blurb from StructuredCreditInvestor points out an interesting conundrum with regard to structured product payouts in the event of the Lehman bankruptcy. While technically, investors in a typical ABS should receive an 'accelerated' payout in the event of (some) default, this court case says that should not be true as that would be 'favoring' some creditors over others.

Daily Commentary

Spreads are wider this morning following equities weaker and the Vix higher. While I don't think it was a driver of this move, it's fortuitous timing for Morgan Stanley to recently pronounce that the credit rally is showing signs of "overextension."

The biggest news in the credit markets this morning is the tender and new issue from Viacom. The market is encouraged by this as 1. they are tendering for bonds at well above existing prices and 2. they have the confidence in the liquidity in the market to do both a tender and new issue at the same time. This will allow them to more effectively stagger their debt maturities and lower their overall cost of debt. It's interesting to note that RR Donnelly announced a very similar move this morning as well.

The Financial Times acknowledged that annual global corporate bond issuance topped $1T for the first time ever. Yesterday, issuance in the US market perked up a bit to $3.75B.

Keeping with my theme of continued appetite for risk, one should note that lower quality bonds (i.e. BBB rated) have outperformed higher quality in this last week's backup in spreads.

The WSJ had an article yesterday pointing out that CDX has been underperforming the S&P. While it is true and most of their points were largely sound, it's a good time to remind folks a few things about the investment grade CDX index. It's made up of 125 equally weighted names that are voted upon by the dealers on a semi-annual basis. Interestingly, very few of those banks/broker/dealers are represented in the index (if you trade it, you cannot be in it). So, it's got a natural underweight in financials relative to most indices. Also, it's made up of 5 year maturities so it will be slightly shorter in duration/maturity than all the major cash bond indices. I'd like to add that the regression between the S&P and the high yield CDX index is perhaps more interesting....it has a higher Z score and higher R squared and shows that high yield spreads 'should be' much wider (or the S&P should be much higher).

Daily Commentary

The heat wave on the east coast of the US seems to have dampened any and all spread movement today. Spreads are unchanged to slightly wider despite higher equities. I'll cite largely the same reasons that I did yesterday....the heavy supply of the last few weeks is still being digested and yields are lower and slightly less appealing.

As I've mentioned almost daily, demand for credit remains strong. This Bloomberg story has a retail investor slant to it but cites Blackrock, Loomis and Fidelity flows.

While some may view the US Treasury as having some credit risk, this story shows that foreign demand for treasuries continues despite lower yields and predictions that it was waning.

When there is a continued demand for risk, or risk taking in this case, it indicates that the animal spirits remain positive. Today's evidence (here) is a story about Citadel opening a leveraged loan trading unit.

As I've stated before, the complexity and heterogeneity of securities in the credit default sector make it very difficult to regulate, trade electronically and clear. Creditsights brought the latest example to my attention. Thomson was recently determined to have triggered a credit event. This was determined by ISDA ex post facto (retroactive to June). Given that Thomson credit is referenced by most of the major European credit indices, it may be removed from those indices and they may now be considered bespoke (i.e. non-standard) and ineligible for most clearing efforts. This will not be true in the U.S. as this was a restructuring (not bankruptcy/failure to pay) and the U.S. indices do not consider restructurings. Clear as mud right?

Continuing on the theme that credit default swaps can be confusing, here is a story about the SEC hounding AIG for explanations and further disclosure of their positions well in advance of their rescue.

I'm surprised we have not seen more popular backlash against the ratings agencies. Here is one rant/editorial by the author of Snowball (Warren Buffet's bio) carried by Bloomberg news.

Daily Commentary

China's enormous market drop overnight and lower treasury yields over the last few days are predictably pushing spreads wider this morning. As one could expect given global equities, the Vix has opened up quite a bit higher which will become an additional cause of concern for credit investors.

Despite this mornings commotion, the broader driver of demand for credit continues. Bloomberg news notes that pension funds globally are still cutting their allocations to equities; credit will certainly receive some portion of that flow.

Recently, JPMorgan cut their year end target for high grade credit spreads from 225bps to 175bps. It's interesting to note that their previous target was set in mid-July and reached only a few weeks later. They do mention that for this to occur, bank bond spreads must narrow (i.e. the remaining sectors will not be the drivers).

Once again, a pending change, or clarification in this case, to an accounting rule may cause huge problems for the banks. FAS 167 may require banks to retain capital for assets that they securitize; heretofore, these were entirely off balance sheet transactions. You can read about it here (thanks to FT Alphaville).

Here's the first bit of sabre rattling I've seen coming from the new pay czar...."I can claw back" he asserts. He then proceeds to say that his discussions have been "very amicable".... I suspect that's a unilateral description.

Daily Commentary

Sunny summer Fridays clearly induce torpor. Spreads today are holding about unchanged and I suspect we'll see declining volume for the rest of the day. With returns topping 13% YTD and yields having declined >50bps in the last month, I would not be surprised at all to see a pullback despite the demand we've been seeing.

There is little in the new issue pipeline for the day. However, yesterday saw a fairly interesting name come to market....Blackstone. This is their first foray into the public debt markets. One should note that when they issued equity in June '07, the S&P was at 1502...not far from it's all time high of ~1560. Take a look at these disparate but comparable debt issues and current mid market spreads:

Blackrock ~145 A1 rated

Fidelity ~290 A1 rated

Blackstone~310 A1 rated

Eaton Vance ~270 A3 rated

Lazard ~355 Ba1 rated (high yield at Moody's)

CIT has come to an 'agreement' with the Fed (here) that they will have a re-capitalization plan in place within 15 days. In the old days (i.e. '07) , bankruptcy court handled something like this, not the Fed. Nostalgic waxing aside, spreads were unchanged to a touch better. November 2009 debt is now trading ~$72. If you're a bull, try the subordinated 2018 bonds now available for ~$26.

Given lack of real news to write about, I'd like pontificate about the matter of banning naked shorts in CDS. While this is a very easy and popular subject for the politicians to support, I don't believe it can or will happen. First of all, they've only recently begun an effort to truly oversee, monitor and regulate this market; potentially imposing a complex revolutionary rule is way down the road. Common equities are a fairly homogeneous security and thus easier to impose a short selling ban. Credit default swaps are very heterogeneous as are the underlying corporate bonds they are attempting to mimic. Will I be precluded from hedging the market using the CDX index if I do not own each of the 125 names contained in the index? If I own a 3.5 year bond from XYZ corp but want to hedge it with a 5 year default swap, is that a prohibited naked swap because of the maturity mis-match? If own Boeing Company debt but see that Boeing Capital default swaps are a cheaper hedge, will that be allowed? I know that simply pointing out problems is not an adequate defense against the measure. However, the government has neither demonstrated an ability to comprehend this market nor elucidated it's support for interfering with free markets.

Daily Commentary

Yesterday's move wider may have been exaggerated by thin attendance; thus today's move tighter may be simply a snap back. Mixed equity performance, mixed swap spreads and a meandering Vix are not sending any particularly strong signals this morning.

The biggest story I've seen this morning has not impacted spreads but should be a matter of concern for the financials. The FASB is debating expanding mark-to-market accounting standards to more assets classes (think loans). As I've noted repeatedly, this could have a huge negative impact on the banks.

I am encouraged by a couple of data points and stories. One, the negative basis continues to narrow showing the resiliency of corporate bonds (over CDS). Two, overall market volumes actually remain pretty healthy (yes, in contrast to my 'thin' comment earlier) and breadth is expanding (up ~15% from longer term averages). Also, a few newswires are picking up the recent Fitch survey showing most European investors believe the worst of the credit crisis has past.

While it's not directly credit related, I am buoyed by the Fed's announcement that their treasury purchases (read manipulation) are being phased out. This is in direct contrast to the Chinese who are attempting to control corporate bond rates (BusinessInsider story here).

Breakingviews notes that investment banks, with the exception of Goldman, are currently focused on generating lower risk profits from client flow business....how cute and antiquated that sounds.

Here's a quick credit sector spread update:

Tightest sectors -

healthcare/pharma

technology

telecom

Widest sectors -

insurance

diversified financials

REITs

The average corporate bond price is currently ~$105.30 (using JPMorgan index data).

I've recently stumbled on an interesting function on the Bloomberg (machine, not news service). You can type REDQ to get real estate delinquency and foreclosure data graphed by region.

Daily Commentary

Yesterday afternoon's weakness has extended overnight into today's session despite global equity strength. Recent heavy supply, a higher Vix and a sobering report from the Congressional Oversight Committee are the driver's of today's move. Recent new issues, especially in the financial space, have weakened from where they came to market.

The Congressional Oversight's report (here) noted, correctly I might add, that the mark-to-market accounting rule changes only temporarily comfort a bank's balance sheet...they do not actually remove the problem assets.

Gadfly Nassim Taleb was on CNBC this morning making a similar case in his oh-so-subtle way:

"We still have a very high level of debt, we still have leadership that's literally incompetent ...They did not see the problem, the don't look at the core of problem. There's an elephant in the room and they did not identify it."

Our brethren in high yield saw an especially heavy issuance yesterday with ~$3.7B in deals coming to market. This is the highest daily amount in 3 months.

There are 2 news items that many are reading as we await the FOMC decision today at ~2:16pm EST. Most importantly is the Obama administration's proposal for derivatives regulation (PR release here, full legal document here). So far, I don't hear the dealers (via ISDA) howling about any particular bullet points.

Today's other summer reading veers towards human interest...or perhaps tragedy. Here is the NYTime's story about Madoff's "aide" DiPascali admitting guilt.

Daily Commentary

The wave of supply is finally starting to meet some slight resistance and spreads are meandering wider. New deals have been coming with little or no discount to existing secondary bonds. While these slightly lower yields are attractive to issuers, they are becoming slightly less so to buyers.

Investor attention this week will largely be on the enormous treasury auction calendar and the FOMC decision/commentary on Wednesday. One should note that Geithner may ask to increase the federal debt limit. Secondary volumes in credit are reflecting that with their usual low August volumes.

Chris Watling of Longview Economics (via The Economist) notes that because corporate spreads lead equities and they are still historically cheap, we have room for equities to rally further.

For those of us used to the illiquidity in secondary corporate bonds, this story griping about the weakening liquidity in (far more liquid) credit default swaps may cause some whining.

Warren Buffet, he who once told us that derivatives were "weapons of mass destruction", seems to have been dabbling in the equity and/or mezzanine tranches of the high yield CDX index; and I'd add that he was not particularly successful. These are not exactly the plain vanilla type of securities where a neophyte derivatives trader should begin. Perhaps he should have read this primer first.

I've noted more than once that credit has been a one-way trade in the last several months. Take a look at this broker's comment about the Bank of England on their efforts to buy corporate paper:

The recent rally in credit indices has coincided with fewer bonds being offered, culminating in no bonds being offered in any auction during the week ending 31st July. As the amount offered has declined it is not a surprise that purchases by the Bank in recent weeks have come almost to a standstill, with a grand total of one bond bought over the past three weeks, amounting to £3m nominal.

Here is an conversation, actually an interview, between 2 very unlikely former adversaries....Henry Blodget and Eliot Spitzer.

The news that State Street's legal fund/reserves may not be sufficient has largely been ignored by the credit markets. However, I should note that STT is not particularly liquid in credit at all to begin with.

Daily Commentary

Welcome to new issue Monday. So far, 9 new issues have been announced this morning and more are expected. For details, type NIM3 on your Bloomberg. Spreads are so far resilient in the face of this supply holding largely unchanged. As I've said before, demand exceeds even heavy (daily) supply such as this. Take a look at this JPMorgan graph showing net supply YTD:

In other news, everyone's favorite uncle from Omaha, Warren Buffett, continues to buy corporate bonds as cited here.

Bloomberg news notes that corporations are hoarding more cash than ever before; largely at the expense of stock buybacks.

I first started mentioning concerns about commercial real estate back in February. It has now elevated to Fed chairman Bernanke list of concerns as something he is paying "close attention" to; perhaps signaling a bottom?

The potentially very lucrative business of clearing credit default swaps has attracted many strong competitors. This article highlights that ICE has taken the initial lead over CME/Citadel and Eurex. Hopefully we won't have a BluRay vs HD DVD type battle here.

Return readers will know that the Vix has recently become a cause of concern for me. This article is perhaps a bit more dire with the title "Vix Signals S&P Swoon".

This blog post had me a bit perplexed this morning; it maintains that sub bank spreads are trading better than senior spreads. All the actual individual spreads I am seeing live do not bear this out.

Daily Commentary

With AIG making money and unemployment easing, all seems well in the world of credit investing.  Spreads are tighter on the day and given the beautiful weather on the east coast, I suspect many of those investors will soon be leaving the office headed to their summer homes.  There are no noteworthy new issues in the queue today. 

The data showing the incredible demand for credit continues.  The natural demand picture, according to JPMorgan, for July showed ~$67B in coupons and maturities paid versus only ~$24B in new issuance.  Also, the recent mutual fund flow data has inflows into credit funds accelerating at a pace ~20% above the YTD average.  

Perhaps yesterday's kerfuffle over AIG risk was not about the tenuous link to Radian's earnings but good old fashioned frontrunning or an earnings leak.  After today's actual earnings report, AIG bonds are up another $2 (on top of yesterday's $5).  

Morgan Stanley paid back their TARP money...or more accurately repurchased their own warrants back from the government.  I found it interesting that they drove a better deal than Goldman (as noted here).

As I noted earlier this year, CSFB bankers were "livid" about receiving their bonuses in the form of their own bonds/deals that they created.  Apparently, they aren't so livid anymore as these bonds are doing very very well (story here).  

For those government conspiracy theory fans, here's a interesting blog post about the US Treasury issuing bonds at auction and then buying almost half of those same bonds back within the week.  

While I am clearly not a technical analyst or chartist, I'd be curious to hear if the techies agree with this layman's opinion that the Vix is forming a base by not setting new lows.  Given that it's opened lower, perhaps this requires further review.

Daily Commentary

Welcome to the abbreviated (due to travel) afternoon version of the Daily Commentary.

I'm a bit flummoxed how equities can be weaker, swap spreads wider, the Vix is higher....and yet spreads are tighter.  If forced to cite a possible reason for today's strength, I'd choose the Bank of England's expanded quantitative easing and a massive short covering rally in AIG risk (all forms).  

AIG bonds are up ~$5 on the tenuous (my term) link between it's business and Radian's recent strong earnings.  "Analysts weren't sure" was the WSJ's response.

Here's the local take on the increased and expanded intervention on behalf of the Bank of England into their government bond market.

Everything Jeremy Grantham writes is a must-read for me...here's his latest about the conundrum of what to do when you're at fair value.

Regulatory inquiries into credit default business practices are popping up as frequently as lice outbreaks at summer camp.  Today's recipient was Goldman Sachs...they of 46 separate trading days of $100mm profit each.   WSJ coverage here.  

Demand for new issues continues...unimpeded even by the summer doldrums.  When 2 REIT deals (from SPG and DRE) clear smoothly, that's a robust market...as REIT's have long been the least liquid sector in the corporate bond market.

Cash bonds continue to outperform (their own) CDS as seen here in this graph from JPMorgan.  You'll note that this negative basis has 'recovered' to pre-crisis levels.  

Daily Commentary

Rising yields have trumped weaker stocks and as a result credit spreads are unchanged to slightly better this morning.

There are several smaller new deals (or re-openings) in the market today as demand remains quite strong for new issues. DOW brought a deal yesterday and those bonds are already 30-40bps tighter than issue spread.

While I've largely been highlighting the bull case for credit, here are 2 mainstream stories with more of a bearish tone on credit. Reuters has a fairly thin article about a potential pullback in spreads (CNBC's headline for the exact same story says "rally may be over"). Bloomberg has a more substantial article noting the CCC rated bonds are up 80% since March lows and are now overpriced (along with other lower rated bonds).

Please forgive me once again for delving into mortgage land as that is clearly not my area of expertise. However, I suspect we should be a bit concerned by the news that prime borrowers defaulted at a much higher rate than subprime borrowers in Q1.

Perusing the DTCC data on CDS outstanding I noticed 2 interesting data points. Berkshire Hathaway, as an issuer not investor, has 6x more net CDS referencing it than it does public debt outstanding. The largest absolute amount of (net) CDS outstanding is GE with ~$11B; the next closest is BAC with only ~$7B.

Daily Commentary

The trends that were in place when I went on vacation remain firmly there upon my return. Strong demand continues to drive spreads tighter and support a healthy new issue market despite lower overall yields. I could go on with other indicators...LIBOR at historic lows, TED spread is back to pre-crisis levels, and lower quality paper spreads are collapsing towards higher quality names.

Using mutual fund flows as a proxy, demand for high grade bond funds was ~35% above average for the last 2 weeks. This is mirrored by outflows being ~35% above average for money market funds over the same time frame. Bloomberg News noted that corporate bond issuance in Europe has already hit an all time annual high of $1.1T even though we've just entered August. Just today, GE announced a deal in the US and demand was >$2B within approximately 30 minutes of the announcement.

The Atlantic Magazine business blog has a comprehensive post about the possible tightening of mark-to-market accounting rules and how this could have a large negative impact on the banks. Please note this post in March noting the easing of these rules....was it coincedental that this was around the time that the lows in the market were set?

Malcolm Gladwell wrote an article in the most recent New Yorker about how the psychology of overconfidence may have driven, or exascerbated, the credit crisis.

The exodus of experienced salesmen and traders from large investment banks to agency-only or boutique shops is well known within the community. Here's Bloomberg's take on the shift....I have a quibble with the use of the term "fired" in their title as many of these folks left on their own volition.

Daily Commentary

PLEASE NOTE - I will be on vacation until Monday August 3rd so postings will be sporadic at best.

Spreads are meandering a bit wider this morning but with little conviction. The trends of lower volatility, diminished supply, strong demand and cash outperforming CDS continue.

JPMorgan has lowered their year end spread forecast from 275bps to 225bps (that index closed last night at 225). They've long cited strong technical demand but have now gained confidence that a strengthening economy will benefit corporate credit metrics.

Mutual fund flow data showed few surprises this week....flows continue into high grade and high yield bond funds while equity funds showed slight outflows and money market funds continue to shed assets at a heavier pace.

Many have verbalized their fear that foreign purchases of US Treasuries will decline. Here's the treasury data from May.....look at the declining trend in row #3.

That worry does not seem to have impacted any emerging market debt investors....their prevalent index, the EMBI+, hit a new all time high yesterday according to Bloomberg News.

Recently, I noted the wide holdings of CIT amongst CDOs. One rating agency, Fitch, took a bit of a contrarian stance and noted that the impact will be muted....largely as most of the damage has already been done to those tranches at risk.

Here are some more insightful thoughts on Goldman and the use of VaR.

Bloomberg News notes that some banks that are facing AIG with their credit derivatives positions may not force them to pay but rather hold them until maturity. Ironically, this will gum up efforts to clean up AIG's books (despite the benefit of no cash calls).

Does it seem everyone is giddy about credit? Giddy enough to pay a corporate bond salesman a $6mm 1 year contract? Yup, read about it here.

Daily Commentary

Tighter swap spreads, higher equities and virtually insatiable demand are pushing spreads tighter again today. The credit market is viewing the CIT debacle as isolated and having virtually no systematic risk or impact. Aside from CIT bonds being down $10-15 the only other impact that I can see, or suspect, is the pick up in the MOVE treasury volatility index. The 3 month regression of credit spreads (using CDX) vs the S&P has them both at about fair value.

JPMorgan's recent credit investor survey showed 94% of investors were increasing, or holding firm, their allocation to high grade bonds. This confidence is why the negative basis continues to narrow; cash bonds have outperformed their own CDS almost ~185bps since the beginning of the year. The dearth of new supply is obviously accelerating this too.

Despite the current low supply, the corporate new issue market is clearly functioning quite smoothly. I am encouraged to see some signs of life in the securitization market as witnessed by this recent AmGen Finance deal from CSFB; especially as the underlying loans are not government backed or guaranteed.

Many, including me, are talking about Goldman's quarterly VaR figure released recently. This blog makes an interesting point; that VaR figure is pretty small in relation to the number of >$100mm trading days. They note that Goldman has requested exemptions from the SEC and permission to use non-traditional VaR measures.

We all remember the 'double secret probation' from the movie Animal House....it seems like the US regulators are now applying similar punishments to both Citi and BoA.

The former corporate strategist at Bear Stearns, Steven Begleiter, has made the final table at the World Series of Poker to be played on November 7th. He's guaranteed at least $1.26mm with a chance at $8.5mm top prize.

Daily Commentary

Spreads are tighter today following stronger equities and a new YTD low in the Vix. This tightening started yesterday just ahead of Intel's strong earnings and held overnight. Lower quality BBBs have outperformed single As in this overnight move.

The negative basis continues it's narrowing march as cash bonds outperform single name CDS. The basis now stands at -78 (vs. it's all time wide of -250). Last August, this stood at -50. The most negative (i.e. bonds cheap vs CDS) is REITs at -300. Industrials, on the other hand, are about flat.

JPMorgan research notes that, thus far, the improvement in broad fundamental credit metrics continues from Q4 to Q1 and now into Q2.

Regarding Goldman's earnings, many have noted it's risk; Goldman's VaR was ~29% higher than it's nearest rival and it's highest in history.

Given the blowout in spreads of index constituents CIT and ILFC, I was not surprised to see the intrinsic index basis gap around a bit; it reads 17bps rich but that's largely noise due to huge moves in those 2 issuers (i.e. tough to arbitrage). A few folks have noted that CIT was the 2nd most popular holding for CDOs which will lead to further downgrades. Technically they are not 'held' by CDOs but rather 'referenced' as these are synthetic CDOs where the underlying names may, or may not, be actually held in the pool of securities; but their performance is always reflected.

While CALPERS is certainly known as being activist, few would call them naive investors. They are suing the rating agencies for "negligent misrepresentation." Story is here.

This is not likely to come as a surprise, but investors should take note that post bankruptcy recovery rates for bonds are well below historic averages. Year to date, recovery for bonds has averaged ~$19 (vs ~$27 last year and a long term average of ~$37). Looking higher in the capital structure to secured loans, those have averaged ~$45 (vs $58 last year and long term average of $71).

Has anyone ever really been surprised when Goldman 'beats expectations'? Spreads were initially a bit skeptical but have since moved slightly tighter. Speculation of a CIT 'rescue', higher equities and a lower Vix are the levers today.

Goldman spreads were ~5bps tighter but are now back to unchanged. Here's a quick snapshot:

JPM ~100

WFC ~140

GS ~145

BAC ~195

MS ~195

MER ~220

Citi ~385 (today's outperformer tighter by ~10bps)

There are 2 regulatory stories that rolled this morning that are of interest. One, the Justice Department is investigating the credit default swap market. Markit Partners, the dominant provider of index and pricing services, first received and disclosed this inquiry. My pure idle speculation leads me to suspect that they may be concerned about Markit's said dominance and ownership by the broker/dealers (who's oligarchy of the CDS market has also come under scrutiny). The second story pertains to the rating agencies. The SEC has decided that they might need some oversight. This is the same agency that was told repeatedly, in detail, about Madoff's pyramid scheme and did absolutely nothing.

Given the turmoil in the finance sector, it's not surprising to see some of these issuers fall into high yield. This is causing some head scratching for the high yield folks as they are unaccustomed to a large finance presence in their index. The finance weighting in the Barclays index has grown from 8.6% to 12.1% and Citi predicts it may end up at ~22%. The natural inclination would be to ignore them as few finance companies remain standing (in high yield) for long. However, this year's eyepopping returns will create some tracking risk/error.

On the investment grade side of things, there are some similar technicals in finance due to consolidation. Yes, it helps the sector's credit ratios (due to cost savings) but it creates larger index weights which can bump up against issuer maximum concentrations. So, in theory, you could like a finance co and it's attractive spread but cannot add to your existing position.

I'm a bit concerned that credit curves have gone back to inverting over the last month. I'm also a bit wary of the spread between BBB and single A rated credits. When risk demand is healthy, that spread compresses. This year, it has compressed ~130bps. However, the spread between the two is now steady at ~100bps which leads me to believe that the demand for relative risk has subsided a bit.

Despite the earnings releases, there are 2 deals in the market this morning. One is a small high quality deal from USAA and the other is a lower quality deal for Carefusion. The USAA deal was met with great demand and quickly closed highlighting the bias for higher quality in the market.

The US market has seen several auto parts makers file for bankruptcy this year. Perhaps they should adopt this unique French tactic of blowing up their own plant?

Daily Commentary

Spreads are meandering a bit wider this morning. We are unlikely to see any sharp moves ahead of major earnings releases this week. This should also keep new issue supply muted. However, the technical demand will exist before, during and after these earnings.

As I've noted previously, investors continue to show their preferences for shorter maturities and higher quality bonds. Dan Fuss of Loomis Sayles echoed this sentiment over the weekend in Barrons.

CIT's struggles and and a 4th consecutive week of S&P decline are starting to nibble away at credit investors confidence. Combine this with developing seasonal illiquidity and some investors are getting nervous. As Gartman mentions in today's Gartman letter:

…we should also remember, however, that in the course of the past several decades, the most violent market movements have tended to come in late July and early August just precisely because the dealing rooms are emptier. Illiquidity during times of political duress can create its own problems, and we remember the Russian problems of August of a decade ago, and the problems attendant to LTCM that evolved out of that earlier crisis. These were “summer” crises, and there have been others, so just because the doldrums have set in does not mean that they are permanent, and that they cannot develop into something far more unstable. They can; they have and they will… we simply know not when.

Throughout most of Q1 and part of Q2, I mentioned the demand from equity investors for liquid lower priced corporate bonds. That trend is almost completely over as the average bond price is now over $102 (using JPM data).

Bloomberg has an interesting function for those of you that would like to see what equity prices and volatility imply for a theoretical CDS spread (actual CDS spreads are there for comparison). Type WMT Equity [key] OVCR [go] to see the output (for WalMart obviously). Not all equities are available and the CDS pricing is not perfectly accurate intraday. However, you can sort by outliers (far right column).

Vanity Fair has an interesting article written by Michael Lewis about AIGFP's Joseph Cassano.

Daily Commentary

Today is likely to be very quiet as we have little supply, nice weather on the east coast and earnings season starts next week. While the major credit derivatives index is slightly wider today, my Bloomberg is littered with quotes insisting cash bonds spreads are tighter.

New issue supply this week is on pace to be down ~40%. I've long been a believer that lower supply can actually hinder confidence in the market. It is far easier for a big mutual fund to get a large trade (i.e. buy) done in the new issue market than it is in the secondary market. If those funds are confident that they can be 'active' then they are also likely to add on to their existing positions in the secondary market. Yes, esssentially I'm saying that supply can create demand. However, the current technical imbalance in the market (of very heavy 'natural' demand) is likely to overwhelm this theory.

Addressing that 'technical imbalance', inflows into high grade bond funds remain steady at their average weekly pace of ~$4.3B. This is a bit surprising as I would have thought the drop in overall yields may have slowed the pace but it has not. Inflows into high yield and equity funds have diminished. Money market outflows have picked up their pace.

Having helped run a valuation group, I am very aware of frequency and ease at which disagreements can arise over the pricing of a security. Suppose you are Jamie Dimon and the entity arguing against you is both your regulator and lender of last resort. You are not exactly arguing from a position of strength. We'll see how this one turns out.

Speaking of lenders of last resort, the FDIC is allegedly declining to back stop CIT's debt. CIT cash bonds are now trading in the mid $50s down about ~$15 in last few weeks.

I've seen a few European economists noting the turnover in the Baltic Freight index. You can graph this yourself on Bloomberg using BDIY . Bloomberg News noted that Warren Buffett's favorite index (US freight carloads) to watch to gauge the strength of the US economy is also turning over. Take a look at their graph:

Should mortgage bond funds be labelled like ski runs? Some folks at the New York Times think so.

The Atlantic Magazine has a blog post with an interesting view on the new PPIP program. They argue that the big banks actually received their relief on their toxic asset marks due to an accounting rule change last year (FASB's easing of mark-to-market). Therefore, they may not be the ones selling assets into the PPIP program. The smaller banks, who did not benefit from FASB, would then be the primary sellers of these assets. These price marks then must be used by the bigger banks.....and that does not bode well for their balance sheets.

Daily Commentary

It seems that if we get signs that the economy is weaker, then money moves out of equities and into credit pushing spreads tighter. It also seems that if we get strong economic data, then treasury yields rise making credit look attractive and pushing spreads tighter. Today is following yet a third pattern which is "well stocks are higher so we should be better." This is all a bit alarming as credit seems largely impervious to accepting bad news. The technical demand may be just that strong.

That demand is not currently being satiated by the new issue market. Yesterday saw only one ~$800mm deal. There is a smaller deal from Korean Gas in the pipeline (pun intended).

Try explaining this one to your parents....Morgan Stanley has created a new CLO that is rated AAA. You'll note that the bonds underlying the CLO were recently downgraded 6 notches (from AAA to A3). Ah the joys and benefits of 'credit enhancement.'

Despite the efforts to standardize and make transparent the CDS market, it's issues like the Ciba/BASF succession event debate that keep many traditional real money investors from using CDS.

I don't think I was the only person surprised that PIMCO was not included in the choices for investment managers for the PPIP program. Apparently, they pulled out in June due to "uncertainties." The program was targetted to be $1T in size but so far has had $30B in government support for $10B in private investment.

There has a been a shift of investors recently into higher quality and shorter maturity paper (as evidenced by spreads and yields across the different maturity ranges). This may signal a lessening of the risk appetite within credit (which could pause the tightening).

This is a pretty shocking graph/stat from the NYTimes:

Back in December 2000, there were about 1.1 unemployed people for each nonfarm job opening. In May 2009, on the other hand, there were 5.7 unemployed workers for each nonfarm job opening.

You don't need to tell me that this is clearly a jobless recovery.

Looking at the last 3 months (only), we are starting to see some divergence between credit and equities. Credit is 'predicting' a higher S&P of ~905 while equities are predicting wider spreads (of ~160 vs current ~140).

Daily Commentary

Spreads are tighter this morning despite weaker equities. This is largely due to continued technical demand facing very light secondary volume and no new issuance (yesterday at least).

There is a story in the WSJ this morning about an anti trust investigation in the telecom industry. Spreads have completely shrugged this 'news' off and are slightly tighter.

The yield on the JPMorgan credit index stands at 6.12%. The spread on the Barclays credit index closed at 273bps.

The FT has an interesting article about the new mode of securitization and how it does not necessarily involve the new underwriting of risk....but rather a re-juggling of existing debt. SIV/CDO redux?

I've long been a fan of innovative ways to graphically display information....thus a devout follower of Edward Tufte. Here are 2 interesting charts from the last few days. The NY Times has this one which shows the depth and direction of this current recession. The WSJ has one that shows the alarming growth of the Fed's balance sheet as they put out fires.

Barrons had an article highlighting some stock short picks. One that trades pretty actively in the credit markets is Pactiv. There is a pretty big diverence between the performance of the equity and the CDS. Either the equity is priced too low or the CDS should be much much wider.

I was not surprised to learn that the part of the brain that controls the motivation of greed is the same that controls sexual desire. I learned this tidbit in Scientific American's article about the science behind economic bubbles and bursts.

Daily Commentary

Spreads are wider this morning following last week's, and today's, equity weakness.

That being said, this week's direction in spreads will likely come from the treasury market. I say this as we are likely to have a dearth of credit news ahead of earnings season and a very light calendar. The US Treasury will issue new 3yr, 10yr and 30 yr bonds this week. Since mid-June, credit spreads seem to be following the yield on the 10yr. So, if you believe that treasury yields are headed higher, like Barrons does, then we could have a tough time in credit.

There is one story that could gather some attention this week.....the MBIA 14s (surplus notes) have a coupon coming due on July 15th. During the split of the company earlier this year, these bonds went with the 'bad company' and are now junk rated and trade in the low $30s. Rating agency pundits will note that they were originally issued with a AA rating. If this coupon is not going to be paid, holders are notified by July 8th. Looking at the SEC/Edgar filings of the top holders, you'll see that >50% of the bonds are held by equity mutual funds. It will be interesting to see how they react.

Yes, lenders should be in the driver's seat at this stage of the cycle (note that I did not say 'crisis'), however I am encouraged that some high yield companies have the foresight and the ability to make extensions on their debt.

First Goldman Sachs gets pilloried by Rolling Stone magazine as the embodiment of evil....now one of their own employees may have stolen their equity prop trading program.

Daily Commentary

We expected that all eyes would be on the payrolls number for guidance and they were. A weak number has equities and credit spreads softer. Remember, it's an early close for the bond market so most investors watch the number, leave a few orders with the desk and head out for the weekend.

In fundamental news today we saw Lear file Chapter 11. For a quick capital structure snapshot of levels, bonds have been trading ~$35 and loans ~$75.

Johnson and Johnson, one of the few remaining AAA rated industrials, just took a $1B stake in Elan. Despite this outlay, JNJ bond spreads remain very tight, largely unchanged and very active.

In yet another data point supporting the trend of equity raising (versus levering up), Rio is raising $15B in rights (story here).

The ECB left rates unchanged. This did not surprise many as most folks acknowledge that it will largely be a quantitative easing story going forward. Trichet is just now beginning his Q&A (see NI ECB on Bloomberg for the headlines) which may have some further detail on debt purchases.

Bill Gross was just on CNBC (post payroll #) stating, amongst other things, that "the government must provide new forms of stimulus."

The latest salvo in Krugman's "It's Reagan's Fault" debate is coming from the National Review in their response "Blame Not the Deregulator."

The most current CDX index (#12) is currently ~17bps rich to intrinsic. As a percentage of spread, this is a pretty high outlier and one should expect that to collapse fairly quickly. This was largely caused by month/quarter end technicals.

Take a look at this article written in January by Bloomberg News about the LIBOR-OIS spread. In it, Alan Greenspan notes that "normal" conditions will prevail when it gets to ~25bps. At the time, the spread has just broke 100bps. Well, it's now ~38bps and going down.

This is a good short weekend read, heavy on human interest, light on insight, about the guy that is unwinding all of AIGFP's swaps.

Daily Commentary

Spreads are unchanged to slightly better this morning as a result of yesterday's month/quarter end buying binge. Secondary volumes were quite heavy with the dealer sell vs buy ratio stuck stubbornly at ~3x.

Both Comcast and Ameriprise are in the market with debt buybacks today.

Given the end of the first half, here's a quick review of index and sector returns (using JPM data):

Investment Grade Index +7.1%

High Yield Index +29.9%

S&P 500 +1.8%

best sector performance:

REITs +36%

Bldg materials +29%

Metals/mining +17%

worst sector performance:

Banks -.5%

Chemicals +1.9%

Yankee banks +2.2%

There were 2 stories this morning that don't bode well for the recovery of government bailout money. The Washington Post writes that it's "sure to be a stretch" that the government is repaid by GM. The NY Times writes that at AIG there's "little hope for a recovery" for the government and other shareholders. Yet the banks are being hamstrung in their attempts to pay back their TARP money?

I missed this earlier article (and blog comment) about the positive impact of the PPIP program even though it never really came online. While I am reluctant to credit Soros with much prescience of late, this reminds me of his concept of reflexivity.

O.K....quick pop quiz....of all the countries in the world, which is most likely to be on the tape this morning defending private equity and hedge funds? Personally, I would not have started guessing socialist countries....but I would have been wrong. Here's the answer.

Daily Commentary

Given low liquidity and secondary volumes, month/quarter end buying has pushed spreads much tighter despite equity weakness. Witness the FranceTel new issue yesterday which was ~5x oversubscribed.

Oracle, Cytec and MetLife are all in the market with new issues today; their timing is likely inspired by the demand for FRTEL.

Bloomberg has an interesting article about correlations amongst different sectors being at all time highs. This is largely echoed in our most watched pair of the S&P vs CDX which over the last 3 months have moved largely in lock step. The only slight outlier seems to be the NASDAQ 100 which credit spreads 'predict' should be lower at ~1440. We've learned that correlation can spike during a crisis....but how should we react when they climb during a rally?

Remember, in a true OTC market like the credit market, if desks are lightly staffed like they are during this holiday week, volumes will remain very subdued (down ~20-30%)...credit trading is neither automated nor scalable. The large bulk of trading this week is month end index rebalancing (i.e. not driven by rational economic price taking). In the old days of 2 years ago, this period was typically dominated by the street lightening up their balance sheets....but now balance sheets are down 60-70% so the impact is obviously less.

Given all the recent chatter about rising commodities, I was a bit surprised by the headline that Euro-zone inflation may have a negative rate.

This may not surprise the mortgage folks, but I was stunned to learn that 28% of all mortgage defaults (65% of all subprime mortgage defaults) started out as prime mortgages.

Daily Commentary

With few other cues to guide spreads they are following global equity markets better this morning. On one hand you have a holiday shortened week that typically sees little supply and falling volatility (Vix, MOVE). On the other hand, you have a month and quarter end which can lead to quite odd technicals in the market. We may see some headlines on Wednesday from the State of California as they threaten to start using IOUs as payments.

AMG mutual fund flows showed a small weekly outflow from high yield breaking the streak of 14 consecutive inflows.

In light of pending bank/broker earnings, the FT has an article about how strong performance from sales/trading/capital markets will outweigh struggling legacy assets on the balance sheet.

Altman is predicting that default rates will rise from their current ~7% to a high of 14%, recovery rates will settle in the low ~$20s and high yield spreads will rise to ~1200bps over treasuries.

You've likely noticed my bemusement over the rating agencies and their new fangled 'enhanced' approach to rating securities that they completely missed in the downturn. Here S&P tells us how they will now require ~20% credit enhancement for CMBS securities to be rated AAA. This is up from ~12%. Perhaps they've noted that commercial real estate looks a bit squishy? Do not underestimate the impact this change will have on the securitized markets.

Apparently Michael Jackson's financial dealings were not as simple as ABC.

Daily Commentary

Lower volatility and firmer swap spreads are trumping weaker global equities, for now, and spreads are slightly better on the morning.

Reaction in the credit markets to yesterday's FOMC decision was largely muted as their asset purchase programs remained unchanged.

So far, I only see a smaller new deal from Jeffries (as an issuer) coming to market today.

Given the U.S. victory over Spain yesterday, I thought I'd revisit one of my favorite pair trades. Yes, we can beat the #1 football team in the world....but can we trade better than Campbell's Soup? The answer is no.....CPB is still trading through (i.e. viewed as lower risk) than the United States government.

Frankly, I'm surprised that AIG is trading better today. Yes, they did 'pay back' ~$25B to the Fed. However, I would have hoped they could do it the old fashioned way by selling a division.....and not by monkeying around with their capital structure (paying off debt with preferred shares).

If you cannot recall the exact date that the OTS took over WaMu....or when the TALF details were first announced...the NY Fed has put together this comprehensive timeline of all the crisis events. It's hard to read it without wincing at each event as you recall them.

This is a great piece, and commentary, on how Goldman views it's own risk and the foibles of using VaR.

Daily Commentary

Lower volatility, tighter swap spreads, minimal supply and almost universally higher equity prices have credit spreads firmer this morning.

That being said, this June has seen the least amount of sun since 1903 and equity returns are positively correlated to the amount of sunshine (according to this paper). If equities weaken, spreads will certainly widen.

While I usually don't delve into outright equity predictions more than once a posting, I thought this story about insider buying drying up was interesting.

Yesterday, everyone was worried about the World Bank's economic prediction of further weakness. Well, today's response to that is the OECD which is predicting the worst is over.

LIBOR rates yesterday hit all time lows.

The negative basis continues it's narrowing rally largely unabated (despite my predictions of a pause). However, I was a bit disappointed to see that credit curves actually inverted another 4bps over the last week which is in contrast to the trend of the last 6 weeks.

Thankfully, new issue supply is light; down about 30% from the '09 monthly average. Historically, June is above average for new issue volume as issuers try to get deals done before the July 4th holiday and then earnings season blackout period.

Secondary volumes remain healthy however the dealer sell vs dealer buy ratio has crept down towards 2x from it's usual 3x. Backing this data up anecdotally, I'm hearing a few folks saying that dealer inventories feel a bit heavy as customer buying has slowed a bit.