Daily Commentary

A higher Vix, lower equities and continued lousy weather on the US east coast have combined to push spreads wider this morning.

Volumes should be somewhat subdued today as they were Friday due to today's quarterly CDS roll and today's European conversion to fixed coupon CDS. Yes, this may force more operational and/or clean-up CDS trades but will likely distract many from making tactical or strategic trades.

Merck seems to be the only new issue in the market today. Remember, the new issue premium has shrunk back to almost zero reducing the relative attractiveness of new issues.

Despite continued unrest in Iran and the US Navy's tailing of a North Korean ship, the headline gathering the most attention is the possible overhaul of the repo markets. Like the CDS market, this function in the market has long been controlled by the tight duopoly of JPM and Bank of NY. Credit spreads in those 2 names are wider in line with the rest of the market. This function was one of the many bogeymen that were cited as contributing to the liquidity problems during the credit crisis.

In JPMorgan's weekly credit piece, they point out the relative attractiveness of negative basis trades despite the recent narrowing. They cite steep short term interest rate curves and increased available leverage as some of the primary drivers of increased ROI. How does this impact you? Expect the negative basis to continue to narrow as cash bonds will (theoretically) outperform credit default swaps.

William Poole, formerly a Federal Reserve governor, made an interesting comment:

“Goldman is to be congratulated for seeing the problem ahead of others and protecting itself from the impending failure of AIG....It’s not the responsibility of any private firm to determine what the public interest is -- that’s why we have a government.”

I agree with him. From the perspective of an investment management firm or broker, prudent risk management often entails insisting on margin or closing positions where margin may be insufficient. These always translate into cash calls for the targetted bank/broker. Can prudent risk managment = a run on a bank?

Many bloggers have taken up the thesis that LIBOR is no longer relevant. Here is a fairly good summary of the arguments.