Daily commentary

If you've seen any headlines this morning, it will come as no surprise that spreads are opening wider.

Global equity weakness, Geithner's comments about possible further 'large amounts' of assistance, and the rising inevitability of GM and DCX bankruptcy have created an understandably foul mood.  

GM bonds are currently about $3 lower on the news.

Some strategists are citing a tepid G20 statement as further reason for weakness but I cannot recall even once in my career a G7 or G20 comment even tipping the needle.

I'm encouraged by some preliminary signs of risk taking by the broker/dealers.  Goldman entered a swap agreement with Lincoln National that helped boost their statutory capital.  The equity markets don't like this as the previous option had been raising government guaranteed debt.  

Swap spreads are mixed and while the Vix remains rangebound, it's moving higher.  

New issue supply will end the month at ~$60B (non guaranteed)....so far, nothing on the docket today with the spread weakness.  The recent pharma new issues are weaker today after strong performance of late.

Greenspan wrote an interesting, and verbose, editorial in the FT about how equity recovery is coming and will help the global economy immensely.

DTCC data shows single name CDS net outstanding shrinking over the last 4 weeks while index outstanding continues to rise.  

Daily commentary

I'm surprised at the torpor in the credit markets this morning given yesterday's Fed announcement.  Spreads are modestly wider this morning echoing a mixed European equity day.  

Most credit investors are likely distracted by the House's proposed 90% bonus tax, the CDX roll and March Madness.  The new CDX (#12) is ~37bps tighter in spread than the old index.

I'm encouraged by how volatility has been relatively rangebound since late last year (Vix largely contained by the 40-50 range).  

EverestRE is tendering for some of their hybrid bonds (down in the capital structure).  Viewed in isolation, it doesn't have a huge impact.  However, it's a good sign that issuers are recognizing the value in their subordinated debt and have enough cash to buy them back.

The new issue market continues to chug along with recent deals from Peco and UPS and a deal in the market today for SPG.

The Fed's TALF program has had a modest successful launch with the first few deals.  This is a complex and unique program that could be expanded further into other market sectors so currently unaffected investors are watching it carefully.

 

After 5 stronger days, the European equity markets are mixed to slightly weaker this morning.  The US credit markets are echoing that open with slightly wider spreads.

Demand is still quite strong for US credit as evidenced by the very healthy new issue market.  Yesterday saw ~$14B in non FDIC debt issued successfully (the bulk of that was PFE).  Today, there's a deal for MMC in the market. 

Some investors are hoping for some 'market support' comments from the FOMC release this afternoon ~2:15pm but I believe that's unlikely.

Bloomberg has an interesting article on wider bid/ask spreads in the credit markets which are leading to healthy broker profits.  I'm suspect on Bloomberg's method of observation however I am not at all suspect of Lloyd Blanfein's comment about "the widest spreads he could recall."

I'm wary that any rally is not sustainable due to the wide basis (on both the index vs constituents and index vs cash bonds).  However, I am encouraged by the color I'm hearing that 'real money' is starting to buy some off-the-run bonds in the finance space. 

It should come as no surprise that bonds issued during the LBO boom with loose covenents are now suffering in this downturn; if this is a surprise to you, you can read about it here.  

Daily commentary

Spreads are opening largely unchanged this morning.  I attribute this to several factors.....mixed equities, Friday the 13th, a 6 OT college hoops game that ended ~1am, and a new 'upgraded' YAS function on Bloomberg; traders are creatures of habit and if one of their most popular functions changes, even slightly, expect a brief drop in liquidity as they complain and adapt.

I've long noted the correlation between the Vix and credit spreads.  It seems to be breaking down this year (spreads moving wider while the Vix drops).  While it could obviously revert back to 'normal' in either of 2 ways (spreads tighter/better or Vix higher [equities weaker]), I'm concerned the latter will occur given how rich the CDX index is versus it's intrinsics (~50bps).  Also, geopolitical headlines like North Korea shutting it's borders and the US shooting down an Iranian drone won't help the Vix.  

Take a look at these mutual fund flows YTD:

money markets +$56B

high grade bond funds +$25B

high yield bond funds +$7.4B

equity funds -$60B

Many cite mark-to-market accounting rules as one of the accelerants of this crisis.  FASB has said that they will soon issue 'guidance' on these rules.  As I've said before, if they ease these rules even slightly, we'll see an enormous rally.

Yes, shareholders have taken it on the chin this year to the delight of bondholders.  Now Jack Welch is kicking you while you're down uttering "shareholder value is the dumbest idea in the world."

FDIC is raising it's fees for it's guarantees so we're seeing a relative spurt in financials issuance ahead of this.

You saw retail sales....here's a quick snapshot of where 10yr bonds trade for a few names (remember, higher spreads indicate more yield but perceived weaker credits):

WMT +185

TGT +325

CVS +360

HD +490

LTD +1100

M +1200

  

Daily commentary

Spreads are wider this morning following the flaccid European markets.  Hearing the comment that banks could "shed...the amount they owe bondholders" from a congressman hasn't helped matters much either.

The obvious question in finance has been, where in the capital structure will the government draw the line?  Hybrids and preferreds have had a whipsaw year as they are clearly the current Maginot line.  Bloomberg had an article today where Dan Fuss uttered that preferreds are "screaming buys."

Given the bond investors are largely pessimists, I found it a bit odd that GE spreads are actually slightly better this morning (so far) despite losing their AAA rating from S&P which they've held since 1956.  The perverse logic here is that S&P put them on stable outlook whereas when they also cut HSBC Finance (old Household) earlier this month to A, they put them on negative outlook and spreads have gotten whacked.

I'm disappointed to see that the negative basis is widening and that secondary volumes have been relatively light.  These tell me that any rally won't have legs.  If the negative basis is widening, cash bonds are lagging any rally in CDS spreads.  If it's just CDS spreads, that tells me that only fast money is buying.  Also, while I am encouraged that new issues are coming to market and getting placed, if secondary bonds are still thinly traded, that tells me it's not a broad buying base.

Speaking of new issues, GS, VLO and SYY are in the market today.  MRK and PFE are looming over the near term horizon.  They continue to be placed easily and perform in the aftermarket.  

Daily commentary

Credit spreads are following the equity market stronger this morning.  I'll leave the debate about whether this rally is for real or a dead cat bounce to more highly paid prognosticators.  

Geithner's comments on Charlie Rose and Citi's 'profit' are the most frequently cited reasons.  I intentionally used the quote marks around Citi's profit.....as almost anyone could show a profit if they didn't include writedowns, were allowed to dispose of bad debt, and had the ability to raise government guaranteed debt at almost a 0% rate.  

The lower Vix seems to have encouraged more issuers to come to market.  We saw ~$5B in non FDIC debt issued yesterday alone.  This brings March to ~$47B (vs Feb $94B and Jan ~$117B [includes FDIC debt]).  So far today, ETN and DIS are in the market with new issues.  For details, on Bloomberg type NIM3

The oft quoted, most liquid, credit index is the CDX (now series 11).  It's currently trading at a historically wide basis of 50bps (with the index being rich vs intrinsics).  You occasionally see odd technicals like this in advance of a calendar roll (mentioned yesterday).

The ICE has rolled out it's CDS clearinghouse this week.  This is REALLY BIG NEWS in the credit markets.  It may not immediately garner all the liquidity but it certainly has everyone's focus....including, most importantly, the Fed.  This is the largest single change to the credit market trading in years so please take your time to get up to speed on it.

  

 

Daily commentary

We can thank Vik and Ben for a strong opening this morning as spreads are following equities.

Vikram Pandit followed GE's lead of a few days ago and extolled Citi's strong (recent) profits and prospects with welcome granularity.

Fed Chair Bernanke's talk and Q&A was well received as well. I found his discussion on fair value illuminating. While not calling for mark-to-market rules to be eliminated, if softened one can expect an enormous rally.

I'm greatly encouraged by 2 things this morning....one, a big drop in the Vix. Two, the new issue market is alive and well.

Yesterday saw ~$17B in FDIC guaranteed debt and ~$2B non guaranteed debt issued. Today alone we're seeing deals from BA, HAL, CVS and South Carolina Elec and Gas.

A few days ago, I noted the irony of S&P calling for rating agency reform. Today's claim from Moody's that they are "getting ahead" of bankruptcy by coming out with a "Bottom Rung" list of troubled credits is amusing. This isn't getting ahead of anything...but rather potentially causing bankruptcy.

Some minor notes....credit curves have steepened by ~4bps over the last month...this is a good thing. Also, the major credit index (CDX) has it's semi-annual roll on the 20th of this month. The new index (#12) will be ~44bps tighter than the old one (#11).

JPMorgan's excellent cross asset class research shows CNA stock as undervalued....the CDS shows the equity should be valued closer to $14 (vs it's current ~$6)....strong Z score and high R squared as you'd expect.

Daily commentary

A predominance of red numbers on the global equity scoreboard combined with a sloppy commute for most folks in the northeast has the animal spirits in a foul mood this morning.  Thus, spreads are opening weaker.  

Here's how the credit markets reacted to MRK's acquisition of SGP.....MRK spreads are ~30bps wider to ~85bps.  SGP spreads are ~40bps tighter to ~125bps.  

Ken Lewis thinks BAC will be profitable for Q1 and all of 2009.    

The FT has 2 interesting articles this morning.  The first tells of how at one point AIGFP (financial products) had ~$307 billion in risk that was only generating ~$156 million in revenues.  I'd label that 'a suboptimal risk/reward ratio'.  The second explains why corporate bonds will be the asset class to choose going forward due to a much higher yield (both absolute and relative to equities), a natural shortage heading into heavy demand and a pseudo government guarantee.  They also note an impending drop in liquidity (a thesis I've long espoused) due to the dwindling number of prop desks and active hedge funds.  

The article in the WSJ about the credit markets seemed a bit simplistic and slightly misleading due to their over-reliance upon bond prices and yields and not spreads or relative valuations versus other asset classes.

GE is bringing a huge government backed debt issue sometime today or early this week.  Investors are starting to worry about the demand buckets (for shorter gov't guaranteed deals) being full already.  

The market is opening slightly wider on weak, but largely expected, payroll numbers.  Mixed global equity markets and wider swap spreads may push spreads wider as the day progresses.  Financials have obviously been the driver of spread weakness this week; financials were ~100bps weaker while industrials were <10bps> during the same time frame.  

The New York Times has a note about Merrill possibly mis-marking a credit index position; more clearly, they marked it down only after the merger closed after being badgered by their internal pricing folks.  This problem is rampant on both the sellside and the buyside; illiquid positions with absolutely no visible markets to use a guide.

The high yield market continues to trade at it's lows.  The high yield index (CDX) is currently priced for 52 of the remaining 95 credits to default in the next 4.5 years.  Wow, that's a grim mood.

GE is doing it's best to combat the rumors and weakness in spreads by pointing out that GE Capital will be profitable in Q1 and won't need federal funding. 

The inflows into bonds funds continue with ~$24B YTD into investment grade.  February's pace was slower than January.

To steal another trader's comment about the Vix at ~50 (vs highs of ~80) "the mood has moved from panic to despair."

With global equities markets down 2-3% overnight, we're opening with wider spreads this morning.  The rumored increased Chinese stimulus package was just that....rumored.

The UK today gave us some good news and some bad news.  Aviva, an insurer, reported a heavy loss which sent the FTSE down pretty dramatically.  On the positive side, the Bank of England announced that it would be purchasing bonds (both gov't gilts and some corporates).  I suspect many eyes will be watching this program to see if it works and whether it would work over here.  This is in addition to a rate cut.

The recent TALF program to rejuvenate the ABS market has heretofore been met with positive response.  The WSJ did a good job explaining how it will work yesterday here.  We're now starting to see more pundits offering their counter opinions before it's even been implemented.

Ford announced what is likely to be only the first proposal of it's debt tender.  Ford bonds were higher on this news and credit default swaps rallied.  Naturally, debtholders were vehement in their desire for better terms.  

In Warren Buffett's annual letter, he mentions 4 times how 2009 will be lousy for his different lines.    

I find it very ironic that Standard and Poor's is now calling for rating agency reform.  They were the ones that assured us that a basket of risky, but uncorrelated assets, were deserving of AAA ratings.  Don't get me wrong, I'm a firm believer in caveat emptor....however, they should stick to fundamental credit research and not correlations.

The new issue market should be quiet today given equity weakness and spreads.

Daily Commentary

Credit spreads have had a pretty volatile day so far starting out weaker but since recovering to slightly better.  I had expected a straightforward stronger opening this morning given the Chinese stimulus package and resultant equity reaction.  I suspect yesterday's down day on the Vix will not be repeated.

The new issue market was dormant only briefly.  Yesterday we saw over $11B in issuance from names such as KO, LLY and Cargill.  All are slightly better than where they were issued.  There were 2 small utility deals issued in the market this morning.  

GE spreads have been getting killed of late.  The CDS for GE are now trading 'points up front' which is typical only of very distressed names.  If you'd like a primer/explanation of 'points up front' please leave a comment on the site.  The NYTimes nicely summarized some of the prevalent worries in the name....largely unrecognized losses.

This month's Atlantic Magazine has an interesting article about how the crisis is impacting different areas of the country.  I was surprised to hear that NYC's financial jobs only make up only 8% of the overall job base....vs Des Moines at 18%, Hartford at 13% and Charlotte NC at 10%.  The national average is ~5.5%.

In a move reminiscent of days gone by, DeutscheBank just hired away 2 traders from BankAmerica.  This is notable for 2 reasons; one, the trend over the last 12-18 months had been to leave big principal trading firms for smaller agency only shops.  Also, these 2 guys (Sean George and Masaya Okoshi) were successful originally on the cash bond side of trading (not CDS).  Perhaps the days of the 25 year old quant jocks getting paid 2-3 sticks a year to trade CDS are over.       

Daily commentary

We remain stronger on the day post the Fed's TALF announcement. This ABS centric program had always had one of the more positive taints of all the Fed programs.  At first glance, it seems to focus on "newly" or "recently originated" securitizations which could could hinder it's ability to help out the owners of the older more toxic deals.  Credit spreads were essentially unchanged on the announcement.

The Barclays Credit Index closed last night at +456bps.  The 3 month wides were +545 and the tights were +424.

New issue volumes remain muted due to volatility and earnings releases.  The only non FDIC deal on tap today is for Coca Cola (KO).

Secondary volumes were largely unchanged from January through February.  

Over the last few weeks,  lower quality credit has outperformed higher quality credit.  This is partially attributable to the banks (i.e. because of the FDIC wrap, they're considered higher quality [for now]).

Scanning JPMorgan's excellent cross asset class research, I noticed 2 equities that are 'underpriced' (if you believe CDS and equities are correlated).  CNA (should be ~$15) and MDT (should be ~$33) show up with high Z scores and healthy R squareds.  

Daily commentary

It's no surpsise that we're weaker today.  However, we're outperforming equities as most of the news that's hurting stocks is not all bad for debtholders.  Dividend cuts and potential bank nationalization help debt metrics at the expense of equityholders.  In addition, those 'income' seeking investors now have fewer places to invest given the recent dividend cuts.

I'm not surprised that the Vix popped ~10% today.  The follow through (will it reach last fall's peaks) will be closely watched by credit investors.

There have been some recent company buybacks of their own hybrid bonds.  It's encouraging to have a company reduce it's debt outstanding acknowledge cheapness of the lower parts of the capital structure.

The AIG serial bail-out does have echoes of Ayn Rand's Atlas Shrugged as noted in this WSJ editorial from January.