Daily Commentary

On Wednesday, yields rose and spreads rallied.  On Thursday, yields fell and spreads rallied.  Today, yields are about flat and.....spreads are rallying.  Here's some context on the all-in yield, not just spread, of the credit market: (source - JPMorgan)

Bloomberg news has an interesting perspective on the PPIP program for bank's 'toxic' assets.  The gap between where banks have these assets marked on their books versus they could sell them (into PPIP) is ~$168B.  This dwarfs the amount of capital that the Feds have told them to raise as a result of the stress tests.  I will be attending the PPIP conference in NYC next week to hear more.    

There was $5.7B in issuance yesterday including Citi (with FDIC wrap) and BoA (without FDIC wrap).  The new issue concession spread is now back to pre-crisis levels.  This is the difference, in basis points, between where a new issue is marketed versus their outstanding bonds in the secondary market (before the deal was announced).

I find it interesting, and a bit disconcerting, that last week saw inflows of ~$14B into money market funds.  This is in stark contrast with the weekly average this year which has been an outflow of ~$6B.  What were these people fleeing?  Were they concerned enough to accept only a few basis points in return for safety?

Bonds issued by highly rated universities have been quite popular in the last few years.  They were peculiar in the sense that they were sometimes issued and traded by the muni desks at the dealers and marketed to muni accounts.  Just as often, these deals were issued by the taxable corporate desks, traded by them and marketed to taxable accounts.  Recently, the ratings agenices have put these universities on negative watch due to dwindling endowments.

In another sign that this rally is 'real', the negative basis of the market continues to narrow.  It currently stands at -140bps having spent much of the last 6 months in the -200 or wider area; pre-Lehman the level was ~140bps.  As a reminder, this basis is a measure of rich/cheap between cash bonds and their derivatives.  When the basis is negative, cash bonds are cheap to derivatives.  As this basis becomes less negative, cash bonds are outperforming.

I'm not surprised that the dealers are pushing back against potential derivatives legislation.  See my earlier post about how TRACE killed dealer's profits.  

      

    

Daily Commentary

Yesterday, credit spreads rallied in the face of a weaker equity market. Today, that euphoria has subsided as spreads are slightly weaker.

GM headlines are rolling across the screen as we speak. GM long bonds were up ~$2 on the day to ~$8.50 (mid).

JPMorgan's most recent credit strategy piece points out that for the non-financial sector, most key credit ratios are far better than the recession of 2002...yet spreads are substantially wider.

Einhorn, the king of taking a position and then talking about it, has chosen a new target (pun intended) of Moody's. I suspect the mood there (pun intended again) is pretty grim after one of their owners, Warren Buffett, stated "we don't believe the people at Moody's...should be telling us the credit rating of a company."

Secondary volume was very heavy yesterday in addition to the $3.65B in new issuance. The dealer sale vs dealer buy ratio remains ensconsed at ~3x.

TRV, CBS and MS are all marketing new issues today.

I think most folks were surprised at how high the WaMu credit card deliquency rate of 18-24% that Jamie Dimon recently mentioned. However, it doesn't seem to have hit/hurt the credit card ABS market broadly.

The blog Calculated Risk has an interesting graph that shows how actual home sales are closely tracking the 'adverse case' scenario under the bank stress test.

As a former true believer, but now a conflicted believer in free markets, I'm not stunned to see some reticence about participating in some of the bailout programs.

Stronger equity markets and higher risk free rates are keeping credit spreads firmer today.  The majority of credit investors were taciturn, at worst, in their reaction to the GM news.

The recent and rising all-in yield for credit has insurance account buyers eager to participate.  In addition, Moody's dismissed immediate concerns about the AAA rating for the United States.  My favorite pair trade to watch remains the US Government vs Campbell's Soup....CPB has gone back to trading 20bps through (i.e. richer).

The new issue market continues to be a shining beacon for credit.  Goldman is in the market with a $1B 10 year bond (actually a re-opening of an existing deal).  This deal is non FDIC guaranteed;  it's obviously encouraging when those deals are clearing easily without government support.  NSC, TLM and possibly MASSMU are also on the launch pad.

I'm surprised that Chevron spreads (and equity) have not yet reacted to this story about a huge potential liability. 

I'm not surprised that the banks want be on both sides of the PPIP program.  Remember, this is an effort to remove 'toxic' structured product from the banks balance sheets.  I suspect a rash populist political solution will soon be imposed.   

While I generally agree with the precept that the rules for the credit default swap market have successfully weathered many tribulations, I still worry about stories like this.  It shows that there is still room for obstreperous litigation or financial engineering.

The insurance sector has rallied dramatically in the last few days.  There seems to be little new news on the fundamental front and I would, perhaps naively, attribute this strength to 2 recent 'cheap' new issues (ALL and AFLAC).  I would note that Allstate credit spreads are trading very rich versus the equity....CDS is 'predicting' an equity level of ~$36 (vs current ~$26).   

Daily Commentary

Credit and equity investors are both imbued with the same confidence that consumers showed in the recently released May data.  Spreads are slightly better as a result. 

There is a mish mosh of new issues in the market today with MET, Westfield RE and EIB in the queue.  I'm hearing that the Westfield deal is coming at rich levels versus it's own CDS and may have to cheapen to clear.  

This week's outcome will largely be determined by the impending treasury auctions and potential deal from FRE.  European credit supply and demand have both been as healthy as here in the U.S.

I'm surprised that Henry Paulson admitted that he didn't really understand mortgage backed securities....dismissing them as 'retail.' 

I'm not surprised to hear that trading while intoxicated can lead to problems.  

The Aussies have lifted their crisis era ban on short sales.

You've heard me mention that most traditional credit crisis indicators have eased to pre-crisis levels.  Bloomberg News notes here that there is still some worry present in the LIBOR markets.   

This fine observation of the global impact of recession is courtesy of Jeremy Grantham's excellent recent Outlook:

"the U.S. is in a position where necessary sacrifices will 

simply be less painful.  We in the U.S. will have to buy 

two fewer teddy bears for our already spoiled four-year-olds.  

The third television set will be postponed as will the second 

or third car.  We will have to settle for a slimmed down 

financial industry and fewer deal-oriented lawyers.  Woe is us.  

China, on the other hand, will close teddy bear factories, and 

send its workers back to marginal or sub-marginal jobs in the 

countryside.  That is the real world, and it delivers real 

pain."

 

Spreads were firm yesterday in the face of the equity selloff.  The credit indices were only slightly wider while a few sectors were actually tighter on the day.  Today, spreads remain firm and equities agree.

Yesterday's equity kerfuffle was about concern that the United States AAA rating may be 'next' to be cut (after the UK).  Both Moody's and S&P came out late in the day and said that the AAA ratings were safe for now.

PIMCO's El Erian was on CNBC this morning.  He believes, as do I, that the short term funding portion of this credit crisis is over (witness LIBOR, TED spread etc.).  He noted that the concern is now what the longer term exit strategy for the government stimulus shall be.

On this very warm holiday shortened day, Geithner has managed to send shivers down many Wall Street spines as he said "we're going to see very very substantial change" in the way compensation is paid.  

MET's CEO noted that his balance sheet is "very strong."   This was met with a 'hunh?' reaction in credit spreads as they are unchanged on the day in line with the rest of the insurance sector.

As I noted, Asian demand remains strong for high quality paper.  This is likely to have driven the issuance of ~$2B yesterday from highly rated Hewlett Packard.  Secondary volumes were above average and 'dealer sell' vs 'dealer buy' ratio remains high.    

To end the week on some (cherrypicked) positive notes....the credit curve normalized by another 2 basis points this week and BBB rated bonds again outperformed single A rated bonds. 

  

Daily Commentary

Heretofore, the technical demand for credit has allowed the market to be somewhat impervious to bad news.  This morning, there is a crack in that resiliency as a trio of bad headlines have spreads wider this morning.  The Fed's negative outlook, new credit card regulations that could hinder profits at the banks and S&P putting the UK's AAA rating on 'outlook negative' are today's culprits.

This holiday shortened week has predictably, and thankfully, had light issuance; yesterday saw only ~$1B in deals with none on tap for today so far.  That being said, secondary volume was very heavy yesterday with the 'dealer sell' vs 'dealer buy' ratio stubbornly high.  

I think most investors can be happy with the progress of bank capital raising.  Remember, only the plans are due by June 6th...yet half the capital has already been raised in only 2 weeks.  The WSJ has a very interesting interactive graphic showing the various capital ratios at pre-crisis levels, a baseline and an adverse scenario.  Be sure to click through all 3.

I regularly mention the negative basis of the market.  I was encouraged to see that that very same metric is watched by the Fed's Open Market Committee (FOMC).  While participants are well aware of the difficulty, equity investors should note that even the Fed can only estimate bid/ask spreads in the corporate market.   

Love him or hate him....everyone has an opinion of Jim Cramer.  This NYTimes article notes a study that his stock picks have outperformed.  

       

At the risk of repeating myself, the bank capital raising has turned out to be entirely an equity story. BAC did it's sneaky equity raising and RF is allegedly next. Credit spreads in that sector are 20-30bps better on the news dragging the entire credit market tighter this morning.

Countering today's strength in bank spreads....I previously feared that this story may come back to haunt us....FASB is gaining momentum in their efforts to move previously off balance sheet obligations back on to the balance sheets. This does not bode well for the already burdened debt ratios of the banks.

The other big sector move this morning are commercial mortgage backed securities (aka CMBS). The Fed has announced that previously issued deals (i.e. the troubled ones) will now also be part of the TALF program; not surprisingly, spreads rallied dramatically.

You surely noticed the recent retail (relative) positive earnings surprises. Those spreads seem to have outperformed stocks; WMT and TGT are 10-15bps better in the last week.

The WSJ had an article speculating over the proper debt ratios for REITs. If lower ratios prevail, then REIT spreads will be much much tighter. Remember, REITs are one of the cheapest sectors in the credit markets.

More than once, I've noted mutual fund flows as one of the strong drivers of technical demand in the market. I've neglected to mention that the long dormant "high quality Asian buyer" has recently come back in to the market with a vengeance. Bonds that are single A rated or higher with ~5 year maturities are in the crosshairs of Asian central banks and pseudo-sovereign government agencies. I'm told the buying has been enormous in the last few weeks (perhaps the reason for the 4x ratio of dealer sales to dealer buys [TRACE data]). This may help the corresponding equities of the same name.

Credit spreads gave up their early small gains after the housing starts/permits number and have settled about unchanged on the day.

The correlations between the credit markets and equities are starting to stretch (Z scores >2.5, R squareds ~.9).  If you believe credit leads equities, the S&P should be closer to ~1100.  If you believe equity leads credit spreads then the CDX index should be ~200 (vs it's current ~148).   

Supply seems to have been front end loaded this week ahead of the holiday.  There was ~$7B in issuance yesterday; for full details type NIM3 on your Bloomberg.  While it's still a bit early, I don't see much supply yet today.

The BIS released it's semi-annual derivatives survey which showed that global derivatives supply shrunk (H2 vs H1 '08) for the first time in the 10 years the survey has been in existence.  Volumes in single name CDS fell ~23% while market values actually increased by a whopping ~78%.  

What's left of Lehman Brothers has asked for a court investigation of Barclays saying that the brokerage unit was massively undervalued at the time of transaction.  While I have not read the entire request, superficially this seems to smack of hindsight.

You are well aware of the macro factors I usually cite as indicators of the (easing of the) credit crisis.  SeekingAlpha has done a great job this morning summing up their progress here.     

Over the last few days, I have noticed a few unique new bond funds popping up (here and here).  They are additional signs that the appetite for risk is back in the market as they are largely unconstrained by index or credit ratings guidelines.  

  

If I had just read the headlines and not looked at levels, I would have incorrectly assumed that spreads are wider this morning; however, they are not and are following stocks tighter.

My evidence:

Obama to increase taxes on insurers

WalMart will beef up it's offering of electronics (think - bad idea jeans)

Sandler O'Neil is ringing the alarm bell on smaller banks capital positions

Japan's credit rating was cut by Moody's (more on this story later)

The European Central Bank is giving out mixed signals and not a uniform response  

If I have to dig deeper in search of positives (beside equities being stronger), I'd once again cite the technical demand.  JPMorgan notes that ~$800B was put into money market funds in Q4 and is now 'languishing' at minuscule yields.  It's funny how last quarters 'safe' investment is now considered a 'languishing' one.  Also, at some point, the ~$200B invested in the FDIC guaranteed debt will find it's way back into the traditional corporate market.  

It's a good thing there's strong demand as BEC, COP, K, AFL and STT are all in the market today with new issues.  Please remember that the bond market closes early on Friday so one should consider this a short week.   

This story about private equity being allowed to buy a bank is sure to get more attention soon.  In the near term it's a positive as it 'creates' a new class of buyers for struggling banks.  In the long term, it could present a problem as their modus operandi is typically to lever up.

Moody's took action on Japan's sovereign debt rating last night.  They cut the foreign currency rating from AAA to Aa2.  They raised the local yen denominated rating to Aa2.  As we all know, perception often matters more than reality; which is why it is interesting to note that the LA Times headline read "Moody's Raises" while Reuters headline read "Moody's Loses Top Rating."  Bloomberg news had it most accurately when it said "Ratings Unified."  In actuality, the cut of the foreign currency rating matters more.  

The talking heads have recently increased their volume about buying gold.  How about this idea which my wife has long espoused.....buy diamonds as a safe haven.  This 'idea' was brought to you by the folks that own and control most of those very same diamonds....DeBeers.     

  

Daily Commentary

Credit spreads are opening unchanged this morning as investors continue to digest the enormous supply of the last week.

The insurance sector is outperforming this morning on the news that 6 companies are eligible for TARP funding.  Most cash bonds in those names are up ~$5. 

Most recent new issues are holding firm during this respite.  At this point, no major investment grade deals in are the queue while WMT brought a 5 year bond yesterday. 

Barclays has placed BGI on the block.  This will only add to the angst of the buyside as consolidation does not often bode well for their employment; remember that Columbia Management is also 'for sale.'

In an additional positive sign for 'risky' assets, yet another investor is raising money to buy distressed bonds (called DIP bonds).  In this interesting, but largely unrelated story, a bankruptcy judge removed CSFB from the 'head of the line' of lenders to the Yellowstone Club due to it's aggressive lending practices.   

Pfizer has said that it will provide free prescriptions, including Viagra, to unemployed and uninsured workers.  Credit spread reaction was flaccid.

Secondary volumes were steady yesterday while the ratio of 'dealer sells' vs 'dealer buys' remains stubbornly high at ~3x.

Flows into investment grade bond funds were ~$1.4B for the week bringing YTD inflows to ~$54B.  Contrast this with equity fund flows of $7.9B for the week and a YTD outflow of ~$61B.  

In a slight reversal of last week, higher quality has slightly outperformed lower quality credit.

Alcoa is credit spread underperformer on the week due to fears of oversupply and/or China flooding the market.  

  

  

Daily Commentary

The credit markets are only slightly weaker this morning having recovered a bit in the last few hours.  We remain in lock stop with equities for now.

Once again, new issue supply remains at the forefront of most credit investor decision.  Yesterday saw ~$9.5B in new debt from issuers AXP, WYN, MTNA, JPM (non gtd) and STANLN (Standard Charter).  So far today, it seems quiet.

Yesterday we heard an ECB member state that they may buy corporate bonds.  Hours later, another ECB member (Weber) said that he 'didn't see the need.'  Clear as mud.

The clamor for regulation of the CDS market is unsurprisingly increasing.  Yesterday, it was Geithner making his case.  Bloomberg had an insightful article about how the popularity of negative basis trades is making it increasingly difficult for issuers to renegotiate debt terms (in the traditional way).  Debtholders are no longer primarily concerned with being paid back as they may also benefit more from a default (due to their corresponding and offsetting CDS positions).  It's a good read.    

Some believe AIG's crown jewel was International Lease Finance.  Personally, I think's it's the Stowe Mountain Resort....which is now officially on the block.

I'm becoming a bit concerned by the ratio of 'dealer sells' to 'dealer buys' (from TRACE data) over the last few days; it has been consistently in the ~3x neighborhood.  That leads me to believe that buyers could be getting full and we could have a pullback.    

MBIA is being sued for the Nth time.  This time it's the banks.  The MBIA 14s (bonds issued from the insurance company) are now trading in the mid ~$30s.  They are Caa2 rated by Moody's (rated Aa2 at new issue).      

Daily Commentary

"Running out of steam", "taking a pause", "overvalued" are the comments I'm seeing this morning as the credit markets take a 'breather' (my term).  Retail sales obviously are the excuse this morning.  Oddly, spreads in the retail sector are only slightly wider today in line with the broader market.

Both Bloomberg news and the WSJ have headline articles questioning the vitality of this rally.  This chart is from Bloomberg's Caroline Hyde (click on it to enlarge): 

Obviously the immense new issue volume, which last week gave us confidence, is now receiving more scrutiny.  JPMorgan notes that net new issuance is only ~$15B YTD (vs ~$200B net for all of 2008).   

Yesterday, I mentioned the massive underwriting fees that are being paid.  When JPMorgan and Citi recently advised Harrah's on a bond restructuring, they were compensated in junk bonds.  I suspect this trend may continue; you may recall that this is not the first time this has occurred.  CSFB's bankers received part of their 2008 bonus in junk bonds....it was called the Partner Asset Facility.  

I'm surprised that the comment from the ECB's Kranjec about buying corporate bonds has not garnered more attention or at least spread reaction.

Yesterday's secondary market volume was quite high at $14.7B.  This was up ~36% from the previous day.  Here's a quick quiz for equity investors....how many individual issuers traded yesterday?  504.  That compares to >5,000 issuers in the US equity market.  As I've mentioned before, but not recently, liquidity is largely confined to recent new issues.  Of the 25 most active bonds yesterday, only 4 were not new issues.  

The CFA institute noted that they have a record 128,600 candidates taking the CFA exam in June.  Those candidates can expect pass rates of ~35%.  I, for one, am glad that I've got my CFA and that I am not required to disclose how many attempts it took.   

 

  

Daily Commentary

Supply, supply, supply.  While the deals largely went well, spreads are slightly weaker this morning.    

Yesterday saw $11.5 in non-FDIC guaranteed issuance.  MSFT, BUD, SPG, USB, SG&E, SO, ALL, BDX, KCRC, BKH and MNPIPE all came to market.  Microsoft had ~$10B in demand alone for it's $3.75B deal.  For the most part, spreads have held in since the deals were priced.  However, some of the recent financial issues have started to weaken a bit.  I'm also hearing that the recent CVS and CBS deals are weaker.

SRE, EQT and AEE are in the market today.   

While that number is indeed a huge figure, it's important to remember that it is still less than the 'natural demand' created by bonds maturing, coupons being paid and inflows into credit mutual funds; depending on who's math you use, so far this month, supply is running ~50% of the estimated demand.     

As you've read here, the bank's capital raise is largely becoming an equity story with raises from COF, USB, BBT (did a debt deal that's struggling), PFG, BK, and KEY.  Let's not forget the enormous fees that all these banks are earning by underwriting equity and debt new issues. 

MBIA released earnings today.  Debt spreads held firm as their AAA rated reference entity was unchanged with the sector and their AA rated reference entity was only slightly weaker.

Germany is proposing a 'bad bank' solution for it's financial bailout.

It will be interesting to watch the fallout from the first ever default of an Islamic sukuk bond.   If a hand is cut off for the crime of theft, I wonder what type of sentence a $100mm default will elicit.  

 

    

Daily Commentary

Credit spreads are wider this morning as we take a brief pause from the tremendous rally we've had.  

The backup in treasury yields is getting some more press as investors worry about the impact of higher mortgage rates on the embryonic housing recovery. 

Despite the comment above, Microsoft has decided that rates are low enough and spreads tight enough to bring it's first ever debt deal to market this morning.  Demand is very strong for this AAA rated entity; expect ~125bps for the 10 year tranche.  SPG, USB and InBev are also in the market.   

As I've noted before, the appetite for risk is back....such that it was the WSJ's lead article this morning.  In the last week, single A rated bonds tightened ~14bps while BBB bonds tightened ~66bps during that same time frame.  It's also notable that credit curves steepened 4bps over the last week; that is a very large move and certainly welcome (you can remember why here).       

One of the reasons that the new issue market had been doing so well is that deals were coming at large spread concessions (i.e. more spread) to existing deals.  This hurt existing deals as they then widened/cheapened accordingly to be in line with the new deal.  JPMorgan notes in recent research that this 'new issue concession' has shrunk to pre-crisis levels.  This will diminish the attractiveness of new deals at the margin but could lend support to existing secondary bonds.    

There has been a lot of noise recently that the dealers still dominate and control the CDS market despite some tepid efforts to broaden the participation (of the buyside).  This article makes a strong case for the potential of conflict of interest.  

      

Daily Commentary

Equity markets globally are rallying on the employment data and stress test results release.  Credit spreads are following suit.  The stress test results themselves were little different from the leaks thus the relief rally result; markets can handle good news and bad news but not uncertainty.  

When equity investors can rattle off the bid-to-cover and tail of a 30yr treasury auction, you know it went poorly.  As deficit spending skyrockets, each additional basis point being paid out by treasury on coupons will haunt us in the future.  Treasury yields will be the 'de rigeur' subject-of-the-day going forward (replacing the TED spread and Vix).   

The new issue market continues to churn along successfully.  Morgan Stanley and BoA both have been in the market with non-FDIC guaranteed deals; likely as a necessary precursor to repayment of TARP funds.  Hasbro and CBS are 2 of the non-finance names currently in the queue.  Credit investors were also enthusiastic about WFC's smooth and successful equity raise.

To remind you why new issues are flying off the shelf, I will cite the $52B in inflows into bond funds this year which is ~10% of the assets under management industry wide. 

In another encouraging sign for consumer spending/finance, AXP needs no further capital and intends to pay back it's TARP money.  Personally, I was a bit surprised to see the MET is in the same boat.  

Whenever credit investors feel too giddy, all they need to do is catch up on Nassim Taleb's latest utterances....the author of the book Black Swan told a conference in Singapore that this crisis is "much worse than the 1930's".  This is the same guy that said yesterday debt should be banned.  

Perhaps I haven't had my eye on the ball, but I was surprised to hear Weyerhaeuser was cut to junk by Moody's.  S&P still has them rated investment grade.  Spreads on the name did not react but expect some selling pressure as many funds will be forced sellers due to client guidelines.    

I found the following explanation of the growth of risk during this bubble to be quite succinct (from WSJ editorial):

"First, businessmen seek to maximize profits within a framework established by government. We want businessmen to discover what people want to buy and to supply that demand as cheaply as possible. This generates profits that signal competitors to enter the market until excess profit is eliminated and resources are allocated most efficiently. Financial products are an important class of products that we want provided competitively. But because risk and return are positively correlated in finance, competition in an unregulated financial market drives up risk, which, given the centrality of banking to a capitalist economy, can produce an economic calamity."

 

     

   

Daily Commentary

Spreads are rallying yet again this morning as the buying continues unabated.  The most watched Lehman Credit Index stands at +381bps which is ~100bps tighter on the year and ~170bps tighter than the widest spreads of last fall.  It's become fashionable, and astute, to once again pay attention to the yield of the index as well as that's an important proxy for the rich/cheapness of the sector (versus mortgages or government bonds).  Using the JPM index, the yield is ~6.75% which is about flat YTD.  

Yesterday saw $9.3B in issuance from 9 companies.  This is the largest 1 day amount in months.  Today alone we're seeing Dow Chemical, Corning and Kinder Morgan in the market.  I've heard that the interest in Dow is ~$12B at spreads in the mid to high 500bps range.  This is pretty surprising ahead of the stress test actual results being released tonight; usually, uncertainty caps demand but apparently all the leaks were sufficient.  

For those folks scratching their heads about the rally in financials given all the need for capital, James Surowiecki notes that it's not new capital per se but rather new equity (converted from existing preferred shares....dilution be damned).   

One of my favorite indicators of the health of the credit markets is to monitor the credit spread of the US Government versus Campbell's Soup.  For well over a year, Campbell's traded through (i.e. better than) the US Government.  I am pleased to note that they are now trading approximately flat to each other.   

Another positive technical point to note is that the ECB has declared it will be buying ~$80B 'covered bonds'.  As a reminder, a 'covered bond' is a pseudo asset backed bond; however, it remains on the issuer's balance sheet (whereas most true asset backed bonds do not).  This will obviously create some cash to be 'put to work'.      

  

Daily Commentary

Credit spreads are rallying this morning despite the stories about enormous amounts of capital needed to prop up the banks.  Investors continue to believe this is an equity story; witness BAC/C/MER spreads are all tighter by 15bps this morning....JPM/WFC/MS/GS are tighter by 5bps.  

The forward economic picture seems to be improving.  JPM just upped their Q2 estimate for GDP to -.5% (up from -2%) with Q3 positive at 1%.  Bernanke highlighted areas of economic strength during his talk yesterday. 

The technical demand picture remains very clear and strong.  Yesterday, Teck issued ~$4B in the high yield space; those bonds are up $5 since yesterday.  On the investment grade side, Xerox, Husky Oil, DTE Energy and Canadian Oil Sands are all in the market with new issues.  With 75% of the S&P 500 having reported, expect this pace to pick up very soon.

Historically, liquidity in REIT debt has been terrible; this was true long before the real estate bubble burst.  Treasurers at these companies are now realizing that they can buy back their debt very cheaply making these bonds even less liquid (remember, liquidity must be viewed symmetrically).  This could give their equity a boost as the balance sheet strengthens.  

There is an interesting civil case before the court in NYC.  The SEC is charging some folks with insider trading; this is notable as it is the first time CDS was the instrument being used.  The defendants lawyers argue the SEC does not have jurisdiction.  Clearly, the regulators are making this an area of focus.  You'll note that the NY Fed has recently been talking about trying to break the dealers' stranglehold the CDS market.

Take a look at these current and historical spreads by sector (from JPM) and you'll see that credit has actually underperformed (click on the graphic once to enlarge it):

The signs of euphoria in the credit markets are plentiful:

- Libor below <1%

- subdued Vix

- negative basis continues to narrow

- credit curves are steeepening

- the TED spread remains at pre-Lehman levels

- BBB rated bonds are outperforming A rated bonds

- investors have largely shrugged off the news that 10 of 19 banks will need capital and that S&P placed many of these banks on negative watch

- another bank is issuing non FDIC guaranteed debt (BoNY/Mellon)

- investors are finally starting to participate in the TALF program

- Fiat, Opel and Chrysler are being called a "supergroup"?  perhaps to mechanics worldwide...

- the US sovereign CDS spread has narrowed to where it's close to Campbell Soup CDS spreads (low ~30bps)

On the day however, spreads are mixed to slightly wider.  Given the recent rally and euphoria noted above, I wouldn't be surprised if we languish or weaken as equities "catch up" to us.

The widest sectors are currently insurance, financials and REITs.  

The tightest sectors are healthcare/pharma, telecom and industrials.

James Surowiecki has an interesting article in the New Yorker debating how big the financial sector should be as a share of US GDP (given that it shrunk in 2008 for first time in 16 years).  

This blog has a great post about pending problems in the municipal market.  

Daily Commentary

Historically, bond investors have been cynics....some bad economic news rolls on the screen and they cheer.  However, in times of crisis such as this, they turn into optimists as good news causes the equity market to rally and improve the prospects of their corporate bonds.  Today is a perfectly good example of the latter psyche.  Strong pending home sales and construction spending numbers this morning have credit investors giddy and spreads are rallying.

At the risk of repeating myself, there are several data series that show that this credit rally may have some legs to it.  They are as follows: credit curves continue to normalize/steepen, the negative basis is rallying and technical demand greatly outweighs supply.  Even Warren Buffett has been tactically buying corporates.  

Given this backdrop, Cigna, Proctor&Gamble, International Paper, Providence Health and Coca Cola Enterprises are all in the new issue market this morning.  They must have confidence in US demand alone as the UK and Japan are on holiday today (Golden Week in Japan).  

Barrons had an article about commercial real estate as the 'next shoe to drop.'  This isn't exactly cutting edge forward analysis....however, it's timely to remind that Wells Fargo is the bank with the heaviest exposure to that sector.  The 3mo. and 1yr. regressions of CDS versus equity predict a lower stock price (~$15) but with weak strength (low R squared).  

While prices already reflected the probability, I should note the first 'credit event' (failure to pay) for a monoline insurer this weekend from Syncora (formerly known as XL Capital Assurance).  There was not much of an impact even within the sector.  

The pending record supply of US Treasury debt seems to be getting more attention than the pending bank stress test results.  Tuesday will see $35B 3yrs, Wednesday $22B 10yrs, and Thursday will see $14B 30yrs.  This is the largest treasury refunding in history.   

I continue to be flummoxed by the stability in the amounts outstanding of CDS from before the Big Bang (mid April) until now.  The only subsectors that have dropped off in volume are index and tranche.  

Daily Commentary

Spreads started the day weaker on the news of the delayed stress test results.  Markets can handle both good news and bad news...but not uncertainty.  The just released confidence number, NAPM and employment data should keep the damage capped.  Volumes are light due to European May Day holiday.

Both investment grade and high yield bonds had their best performance month (April) in decades.  Merrill's high yield index was up 9.7% and JPMorgan's investment grade index returned 2.3%.  The weaker rated bonds were the outperformers in both universes.

Given the lack of European attendance, the new issue market is moribund today.  I'm seeing deals from small issues from BP and Rockwell only.  Most recent new issues have performed well with the exception of the deal from BB&T which has struggled.  April saw $59B in new issuance.  So far, year to date there's been $242B in issuance (excluding FDIC guaranteed debt).  Last year at this time, we had had $314B in issuance so the pace is down ~23%.

Credit investors are once again paying attention to yields rather than spreads.  While breaking the 3% yield on the treasury 10yr obviously leads to lower prices, at some point soon the all-in yield (treasuries + credit spread) will again be attractive to other investor classes (think insurance companies).