Daily Commentary

Spreads are rallying again this morning on top of yesterday's strong rally.  Credit investors do not seem that concerned over the alleged DCX filing, bank stress tests or swine flu.  They are largely focused on extremely strong technical demand, a dropping Vix, normalizing credit curves, firm swap spreads and a shrinking negative basis (cash bonds outperforming CDS).

Most notable this morning is the inaugural US dollar corporate bond issue for Nokia.  They are bringing a 10 and 30yr bond to the market in the ~250-275bps range (over US treasuries).  Compare that to Motorola which trades ~660bps.  Bear in mind that Motorola is barely investment grade while Nokia has a strong single A rating from the agencies.

I'm surprised there is not more chatter about the potential FASB ruling on off balance sheet financing.  This could eventually bring billions of dollars of obligations back onto (already weak) bank balance sheets.  There's not much detail here yet but expect this to put pressure on bank spreads.

In a sign that sentiment seems much better, the Whistlejacket SIV liquidation occurred and it went fairly smoothly.  This was a notable and large investment vehicle that held ~$7B in assets (primarily structure product) when it was declared insolvent in February 2008.  Suffice it to say that this would not have occurred at all, let alone so quietly, unless confidence and demand were deemed strong enough.  

Eric Beinstein's excellent research group at JPMorgan shows that investment grade credit spreads are currently predicting that the S&P should be just above 1000 (1yr regression, Z score >2, R squared ~.8).  So, if you believe credit leads equities, it's time to buy stocks.