Daily Commentary

Spreads are modestly tighter today in sympathy with higher equities. Yesterday's pop in the Vix will likely keep any spread rally capped.

Credit investors remain focused on treasuries and the Fed this week. We have 2yr, 5yr and 7yr treasury auctions for ~$100B this week in addition to the FOMC announcement tomorrow at 2:15ish.

Yesterday, I noted that European investors switched to fixed coupon CDS yesterday mirroring the US market. However, I neglected to note that the European market will have 4 different coupons while US investors will suffice with just 2. This is yet another example of how homogeneity seems to be difficult to achieve in this sector.

Continuing a positive theme, to credit investors at least, Royal Ahold announced a debt buyback this morning.

Life insurance spreads are getting crushed this morning without any real fundamental news to speak of. I've noted their recent rally in spreads over the last few months; look at Allstate which has rallied from ~400bps in March to it's tights earlier this month of ~95bps. It's currently trading ~120bps.

I'm encouraged by the Merck new issue which is ~10-15bps tighter than where it was issued yesterday. They were able to cover all their takeover financing needs (for SGP) in one fell swoop.

CMBS spreads have had quite a volatile year; from early March until early April they had rallied from ~800bps to ~400bps on news that the Fed's purchase program would be expanded. However, fundamental concerns about the sector have been around for quite some time. Those concerns received more press today here.

Here's another story to add to the pile of my posts on "appetite for risk is back".....Byron Trott was able to raise $2B for his new private equity firm.

If you simply regress the credit markets (using CDX) and the S&P 500 for the last 3 months, there is little diversion (Z score of 0 with R^2 of ~91). However, if you regress those same 2 data series for 1 year, credit spreads are predicting an S&P of ~1100. So, if you think this environment is the new paradigm, then everything is 'fairly' priced. However, if you think this market is just temporary, then either credit spreads need to go wider or the S&P needs to higher (or some combination therein).

Today's anecdotal sign of the economy remaining weak....I called a few contractors yesterday afternoon looking for some minor drywall work to be done. All 3 called back within 1 hour and the guy I chose arrived this morning at 7:30am.