Daily Commentary

Spreads are tighter today following stronger equities and a new YTD low in the Vix. This tightening started yesterday just ahead of Intel's strong earnings and held overnight. Lower quality BBBs have outperformed single As in this overnight move.

The negative basis continues it's narrowing march as cash bonds outperform single name CDS. The basis now stands at -78 (vs. it's all time wide of -250). Last August, this stood at -50. The most negative (i.e. bonds cheap vs CDS) is REITs at -300. Industrials, on the other hand, are about flat.

JPMorgan research notes that, thus far, the improvement in broad fundamental credit metrics continues from Q4 to Q1 and now into Q2.

Regarding Goldman's earnings, many have noted it's risk; Goldman's VaR was ~29% higher than it's nearest rival and it's highest in history.

Given the blowout in spreads of index constituents CIT and ILFC, I was not surprised to see the intrinsic index basis gap around a bit; it reads 17bps rich but that's largely noise due to huge moves in those 2 issuers (i.e. tough to arbitrage). A few folks have noted that CIT was the 2nd most popular holding for CDOs which will lead to further downgrades. Technically they are not 'held' by CDOs but rather 'referenced' as these are synthetic CDOs where the underlying names may, or may not, be actually held in the pool of securities; but their performance is always reflected.

While CALPERS is certainly known as being activist, few would call them naive investors. They are suing the rating agencies for "negligent misrepresentation." Story is here.

This is not likely to come as a surprise, but investors should take note that post bankruptcy recovery rates for bonds are well below historic averages. Year to date, recovery for bonds has averaged ~$19 (vs ~$27 last year and a long term average of ~$37). Looking higher in the capital structure to secured loans, those have averaged ~$45 (vs $58 last year and long term average of $71).