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.