Daily Commentary

China's enormous market drop overnight and lower treasury yields over the last few days are predictably pushing spreads wider this morning. As one could expect given global equities, the Vix has opened up quite a bit higher which will become an additional cause of concern for credit investors.

Despite this mornings commotion, the broader driver of demand for credit continues. Bloomberg news notes that pension funds globally are still cutting their allocations to equities; credit will certainly receive some portion of that flow.

Recently, JPMorgan cut their year end target for high grade credit spreads from 225bps to 175bps. It's interesting to note that their previous target was set in mid-July and reached only a few weeks later. They do mention that for this to occur, bank bond spreads must narrow (i.e. the remaining sectors will not be the drivers).

Once again, a pending change, or clarification in this case, to an accounting rule may cause huge problems for the banks. FAS 167 may require banks to retain capital for assets that they securitize; heretofore, these were entirely off balance sheet transactions. You can read about it here (thanks to FT Alphaville).

Here's the first bit of sabre rattling I've seen coming from the new pay czar...."I can claw back" he asserts. He then proceeds to say that his discussions have been "very amicable".... I suspect that's a unilateral description.