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'.