Daily Commentary

Today is likely to be very quiet as we have little supply, nice weather on the east coast and earnings season starts next week. While the major credit derivatives index is slightly wider today, my Bloomberg is littered with quotes insisting cash bonds spreads are tighter.

New issue supply this week is on pace to be down ~40%. I've long been a believer that lower supply can actually hinder confidence in the market. It is far easier for a big mutual fund to get a large trade (i.e. buy) done in the new issue market than it is in the secondary market. If those funds are confident that they can be 'active' then they are also likely to add on to their existing positions in the secondary market. Yes, esssentially I'm saying that supply can create demand. However, the current technical imbalance in the market (of very heavy 'natural' demand) is likely to overwhelm this theory.

Addressing that 'technical imbalance', inflows into high grade bond funds remain steady at their average weekly pace of ~$4.3B. This is a bit surprising as I would have thought the drop in overall yields may have slowed the pace but it has not. Inflows into high yield and equity funds have diminished. Money market outflows have picked up their pace.

Having helped run a valuation group, I am very aware of frequency and ease at which disagreements can arise over the pricing of a security. Suppose you are Jamie Dimon and the entity arguing against you is both your regulator and lender of last resort. You are not exactly arguing from a position of strength. We'll see how this one turns out.

Speaking of lenders of last resort, the FDIC is allegedly declining to back stop CIT's debt. CIT cash bonds are now trading in the mid $50s down about ~$15 in last few weeks.

I've seen a few European economists noting the turnover in the Baltic Freight index. You can graph this yourself on Bloomberg using BDIY . Bloomberg News noted that Warren Buffett's favorite index (US freight carloads) to watch to gauge the strength of the US economy is also turning over. Take a look at their graph:

Should mortgage bond funds be labelled like ski runs? Some folks at the New York Times think so.

The Atlantic Magazine has a blog post with an interesting view on the new PPIP program. They argue that the big banks actually received their relief on their toxic asset marks due to an accounting rule change last year (FASB's easing of mark-to-market). Therefore, they may not be the ones selling assets into the PPIP program. The smaller banks, who did not benefit from FASB, would then be the primary sellers of these assets. These price marks then must be used by the bigger banks.....and that does not bode well for their balance sheets.