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.