Daily Commentary

Spreads are generically a bit tighter this morning in muted volumes.  Volumes are muted due to the CDS Big Bang occurring today as well as the beginning of earnings season.  I'm a bit concerned about widening swap spreads in Europe...that typically does not bode well for our financial sector spreads.  Expect new issue volume to be light as well with only 1 deal (from Qwest) done yesterday and none being bandied about.

Credit investors must believe that CTX/PHM merger is sure to happen as spreads almost immediately converged to the ~260 area.  CTX needed to tighten ~180bps to get there while PHM was only a few bps tighter.  Usually you see ~20-50bps in deal risk but not in this instance.      

As a reminder, all CDS trading for new contracts going forward will have fixed coupons.  This is a very very big deal as it helps reduces counterparty risk and should increase liquidity.  For a very good and detailed summary of why this is happening and why it matters, please see this excellent blog entry.  CDS volumes will be subdued for the next week or so as investors figure out how to trade, model, and settle them.  

The primary credit index (CDX) is now ~31 rich to it's underlying.  Until today's Big Bang that was very arduous to arb....but no longer....watch for that to shrink.

Equity and debt investors are both reacting the same way to the positive TARP news on the life insurers with most life insurer bonds up several points.  There seems to be some chatter that REITs are up next for a bailout.  Included in this sector rally is LNC which seems re-arranging deck chairs on the Titanic. 

ILFC bonds are up ~$5 on news of a possible Fed line of credit.  This has given confidence to the (alleged) 3 interested buyers in the aircraft leasing business.

Bloomberg released it's Q1 underwriting league tables for investment grade bonds (below, with market share %):

JPMorgan 14.4%

BoA 14.3%

Citi 14%

MS 10.8%

GS 10%

That's quite a concentration at the top...some would call it an oligopoly.  The #6 only has a share of 6.7%.  Given how I've noted that liquidity (and thus bid/ask spread profit) is concentrated amongst recent new issues, this will be a big boost to those banks at the top.