Daily Commentary

Credit spreads shrugged off earlier equity weakness and are rallying once again today.  This week's rally of ~35bps was a slight reversal of last week's in that single A rated bonds outperformed lower quality BBB's.  The negative basis continues it's dramatic narrowing to it's current 111bps; remember that the FOMC watches this number as one of the indicators of the health of the credit markets.  

The market saw ~$32B in supply this week which was ~18% above the weekly average.  So far, this summer Friday has no new issues in the queue largely due to the unemployment figure (which has the potential to create a volatile rates environment).  

Secondary volumes remain slightly above average with the dealer sell vs buy ratio reverting back to it's sticky longer term average of ~3x.

Inflows into high grade bond fund were 3x their weekly average this week.  Thankfully, money market funds have returned to their 'normal' outflows after last week's aberration.

Bloomberg news has noted that some of the banks recent positive income reports are buoyed by FASB loosening it's rules; I had noted this potential previously.

What major index is up a whopping 27% YTD?  High yield.

Mortgage investors were not surprised that NY Fed Governor Dudley noted yesterday that AAA RMBS securities may not be supported (i.e. purchased by) the Fed's TALF program.

I was surprised to see in the DTCC data that gross credit derivatives index outstanding has shrunk ~40% since last fall.  I suspect most of this is due to collapsing of dealer vs dealer positions (as the number of dealers shrinks).

What government product has a consistent negative gross margin of 40%?  The penny.  It costs 1.7 cents to produce each one (story here).