Daily commentary

The market is having a schizophrenic opening today.  Spreads are slightly wider but off the wides this morning despite stocks being stronger and bank spreads being tighter.  There are no strong daily signals from any of the usual suspects of swaps spreads or the Vix.  I suspect it is a more simple 'risk indigestion' after a huge issuance month.  

The big story is obviously the potential larger government stake in Citi common equity.  WSJ article (see the last few paragraphs) says the move is largely driven by a shift in focus from watching a bank's Tier 1 capital ratio to watching their tangible common equity.  Citi's CDS levels are tighter by ~65bps to 410bps....if the US government is likely to back their debt, obviously their credit risk goes down.

There's talk in other sectors (government and mortgages) about a larger than average extension in the index this month.  This has and will force month end buying of long maturity bonds of all sorts as investors and indexers alter their portfolio to better match the Barclay's indices.  You see this after heavy issuance months....as 'new' 10yr and 30yr bonds replace old issues that have matured.  The official announcement will come at the end of the week.

Remember the beta vs VHS format battles?  Blu Ray vs HD?  We're seeing a similar intransigence in the competing entities for the CDS clearinghouse.  No one will dare trade on any of them until there's a clear winner.....and there will be no winner until someone starts trading on one of them.  In the old days, the government would let the markets settle it....I suspect Geithner may anoint a winner.  I usually deplore government intervention, but it may be a means to a needed end. 

If you believe CDS leads equities, it's time to buy the common for AES and CNA.  Both have very high Z scores and R squareds (1yr CDS vs equity price regression, JPMorgan data).