Daily Commentary

The wave of supply is finally starting to meet some slight resistance and spreads are meandering wider. New deals have been coming with little or no discount to existing secondary bonds. While these slightly lower yields are attractive to issuers, they are becoming slightly less so to buyers.

Investor attention this week will largely be on the enormous treasury auction calendar and the FOMC decision/commentary on Wednesday. One should note that Geithner may ask to increase the federal debt limit. Secondary volumes in credit are reflecting that with their usual low August volumes.

Chris Watling of Longview Economics (via The Economist) notes that because corporate spreads lead equities and they are still historically cheap, we have room for equities to rally further.

For those of us used to the illiquidity in secondary corporate bonds, this story griping about the weakening liquidity in (far more liquid) credit default swaps may cause some whining.

Warren Buffet, he who once told us that derivatives were "weapons of mass destruction", seems to have been dabbling in the equity and/or mezzanine tranches of the high yield CDX index; and I'd add that he was not particularly successful. These are not exactly the plain vanilla type of securities where a neophyte derivatives trader should begin. Perhaps he should have read this primer first.

I've noted more than once that credit has been a one-way trade in the last several months. Take a look at this broker's comment about the Bank of England on their efforts to buy corporate paper:

The recent rally in credit indices has coincided with fewer bonds being offered, culminating in no bonds being offered in any auction during the week ending 31st July. As the amount offered has declined it is not a surprise that purchases by the Bank in recent weeks have come almost to a standstill, with a grand total of one bond bought over the past three weeks, amounting to £3m nominal.

Here is an conversation, actually an interview, between 2 very unlikely former adversaries....Henry Blodget and Eliot Spitzer.

The news that State Street's legal fund/reserves may not be sufficient has largely been ignored by the credit markets. However, I should note that STT is not particularly liquid in credit at all to begin with.