Daily Commentary

Tighter swap spreads and a lower Vix are pushing spreads tighter today despite weaker equities.  Credit curves continue to steepen (actually reverting towards 'normal') and the negative basis continues to narrow.....these are both strong signs that the spread rally is sustainable.

The top of everyone's discussion list is the pending bank stress test parameters and results.  Most notable is the (leaked) target for tangible common equity of 3% which is slightly lower than expectations.  I don't suspect they would target an insurmountable level....so expect results to come in close to that 3%.  Michael Milken reminds us that it's very important to focus on the proper capital structure.

Morgan Stanley's CFO says they would "consider" paying back their $10B TARP line.  This comes 1 month after their CEO Mack said "[it's the] wrong time" to pay it back. 

Hartford insurance is trying to sell it's property insurance unit for ~$4B.  Spreads were initially weaker as this was viewed as the crown jewel.  However, spreads have since recovered to only slightly weaker in line with the rest of the sector.

The UK government may embrace a very different way to sell their government debt (ahead of a pending flood of issuance).  They are considering syndicating the debt issuance in much the same way as corporate issuers do.  A pundit would view this as a sign of weakness....needing a broker/dealer to aggressively peddle that which previously 'sold itself'.

The ICE and CME are racing to gain share in the clearing and settling of credit derivatives.  Obviously, this will be quite lucrative given the triple digit growth over the past few years of credit derivatives.  At this point, ICE seems to be taking the lead.     

S&P cut their ratings on ~$8B of CDO's backed by residential mortgages.  29 of these 39 tranches face further pending cuts.    

Daily commentary

The market is having a schizophrenic opening today.  Spreads are slightly wider but off the wides this morning despite stocks being stronger and bank spreads being tighter.  There are no strong daily signals from any of the usual suspects of swaps spreads or the Vix.  I suspect it is a more simple 'risk indigestion' after a huge issuance month.  

The big story is obviously the potential larger government stake in Citi common equity.  WSJ article (see the last few paragraphs) says the move is largely driven by a shift in focus from watching a bank's Tier 1 capital ratio to watching their tangible common equity.  Citi's CDS levels are tighter by ~65bps to 410bps....if the US government is likely to back their debt, obviously their credit risk goes down.

There's talk in other sectors (government and mortgages) about a larger than average extension in the index this month.  This has and will force month end buying of long maturity bonds of all sorts as investors and indexers alter their portfolio to better match the Barclay's indices.  You see this after heavy issuance months....as 'new' 10yr and 30yr bonds replace old issues that have matured.  The official announcement will come at the end of the week.

Remember the beta vs VHS format battles?  Blu Ray vs HD?  We're seeing a similar intransigence in the competing entities for the CDS clearinghouse.  No one will dare trade on any of them until there's a clear winner.....and there will be no winner until someone starts trading on one of them.  In the old days, the government would let the markets settle it....I suspect Geithner may anoint a winner.  I usually deplore government intervention, but it may be a means to a needed end. 

If you believe CDS leads equities, it's time to buy the common for AES and CNA.  Both have very high Z scores and R squareds (1yr CDS vs equity price regression, JPMorgan data).