Daily Commentary

Weaker global equities have credit spreads following suit. Secondary volume was very very light on Friday and once we get past today's month-end activity, I suspect the rest of this pre-Labor Day week will be light as well. Only one new issue, from Republic Service Group, is in the market today.

M&A is definitely back as 2 deals were announced today. Disney buying Marvel and Baker Hughes buying BJ Services. BHI spreads are ~7-10bps wider on the news and they made a comment on the conference call that if the bond market stays where it is, they'll term out the debt (i.e. it's really attractive for us to fund now). DIS spreads were only a few basis points wider in line with the broader market.

Radio Shack is following the trend of deleveraging and tendering for 1 of it's outstanding bonds at above market prices. To give you equity folks a feel for corporate bond trading, these particular bonds only traded once during June, once during July and once during August in non odd lot size. As one could extrapolate, this throws quite a wrench into the works for those that had bought protection on RSH in the credit default swap market (i.e. a short squeeze).

Speaking of credit default swaps, I've mentioned more than once the existence of an oligarchy that profits quite handsomely from this market. Here is a Bloomberg story about their efforts to lobby against regulation and change.

I've recently noted the potential harmful impact on the banks of the pending accounting rule change with regard to securitized assets. Apparently, the FDIC also recognizes this and is now proposing a phase-in as opposed to a Big Bang.

Yes, this is slightly old news but Bloomberg has a good piece about the leverage at the banks picking up. Speaking of banks growing....here's a Washington Post piece (via The Atlantic) about those banks that were 'too big to fail'...and are now bigger.

Post a failed LBO, there's often loads of sour grapes whining. Here's a piece in BreakingViews about Tribune bondholders claiming fraudulent conveyance.

I missed this piece last week in FT/Alphaville which was a commentary from PIMCO's El-Erian regarding a 'to-do list' for Bernanke for his second term.

Fortune magazine has a longer article about Chris Flowers and the loss of his Midas touch.

Daily Commentary

Spreads are meandering slightly tighter this morning following equities. While I acknowledge it is a summer Friday, I'm surprised that secondary volumes are so light given the impending month end. No new US issues are on tap so far today. Looking at the JPMorgan credit index, the current yield is 5.45% and the average bond price is $105.24.

I'd think the credit markets would have been more encouraged by AIG's new CEO saying that he would be patient with his asset sales. A prudent seller helps all markets...AIG CDS is slightly weaker on the day however.

It's rare to find an enormous disparity between the credit views of the two major ratings agencies Moody's and S&P. Thus today's Reuters story highlighting their current wildly different beliefs about high yield default rates makes for interesting reading.

Recently I noted that Israel was the first central bank in this cycle to hike rates. Contrast this with Sweden which recently cut rates below zero (story here).

Clearly I should not delve too far into global macroeconomic theory given that this story surprised me a bit....the Economist maintains that a country's investment returns are not correlated with it's GDP growth.

While some companies would prefer to avoid their regulators at all costs, others feel it benefits them to be close or friendly. This approach, from disgraced financier Allen Stanford, is taking the latter to a creepy extreme.

Daily Commentary

Spreads are largely unchanged this morning in light volume. On the new issue front, only 1 deal from Praxair seems to be queued up. The recent P&G benchmark deal, which can be used as proxy for the health of the new issue market, remains a few basis points tighter than where it was issued. While secondary volume is off a bit, the breadth of the market remains healthy.

JPMorgan credit research recently noted that EBITDA margins in Q2 were actually above the average of the last decade.

Diageo's CEO was on the tape this morning making comments about his eagerness to make acquisitions; spreads in Diageo CDS were about 5bps wider to the low 70bps area. I note this as it's been quite some time since I've seen any M&A chatter affecting spreads.

The long awaited FDIC rules (39 pages of them) regarding private equity firms buying failed banks have been released (here). As expected, the capital requirement was lowered from the proposed 15% to a more palatable 10%. However, this Reuters Blog astutely notes that it's no longer pure Tier 1 capital (reserve) but rather Tier 1 Common Equity.

Fed governor Lacker made comments (here) that concluded with his intention to revisit whether the Fed should complete it's entire targetted purchase of $1.25T of mortgage backed securities. This is likely to raise many eyebrows amongst the mortgage crowd. In theory, most investors disapprove of any government intervention in the markets....while in practice, everyone privately likes it when the government artificially inflates the price of securities you own.

Given the lack of credit focused news items to write about this morning, I'll delve into mortgages for the second time today. The NYTimes has an article about the enormity of pending mortgage rate resets coming in the next few years that could easily threaten any real estate recovery. BusinessInsider's Henry Blodget also has some graphs on the same matter (here).

Buttonwood from The Economist has a short posting here about the debate whether private equity owned firms outperform public firms.

Daily Commentary

The market is suprisingly resilient for a late August day. Spreads are unchanged to slightly wider but secondary volume and breadth are quite healthy. I would like to reiterate, however, that credit spreads have definitely lagged the rally in the S&P since early July.

The new issue market is performing well with a large issue yesterday from P&G (which is slightly tighter in the secondary) and new issues today from Westfield Group and Roper Industries. Roper is barely investment grade rated yet the deal is several times oversubscribed.

Zerohedge has posted a copy of a letter to the SEC attributing blame for the money market fund problems clearly on the rating agencies. While this in itself is no shocker, the fact that the author of the letter runs a rating agency himself is unusual...as you can imagine, he largely points the finger at his competitors.

Looking at the DTCC data, I did notice one data point that was out of line with much longer term trends. Gross index outstanding has actually picked up for the first time in a long time; growing liquidity in that index bodes well for the market. Before the credit crisis, you could easily do a $2B trade, on the wire, with little impact to the market. During Q1, that liquidity dropped to $25-50mm but has gradually crept back up to $500mm-$750mm size markets.

This slightly dated article from the NYTimes draws some comparisons between GE and Enron with regard to their earnings management (aka manipulation). It quickly reminded me of one of my favorite contrarian articles of all times from Malcolm Gladwell in the New Yorker (here). In it, he argues that all of Enron's financial information was publicly available for those willing to solve a very very complex puzzle.

Commercial real estate is still struggling. However, some may point to the recent drop in delinquencies (the first since August 2008). Realpoint Research (via FT Alphaville) notes that it's simply a technical due to a large amount of GGP backed loans temporarily returning to 'currently paying' due to modifications.

Daily Commentary

Credit spreads are largely unchanged this morning in advance of a slew of real estate data. Case/Shiller for June was slightly better than expected while we are still waiting on FHFA for June and new home sales for July.

While we're only seeing 1 small deal from DUK in the US investment grade market today, Europe is witnessing 2 very interesting offers from Banco Santander. Their first offer is to buy back securitized product that they issued at slightly discounted prices (details here). This is certain to help liquidity in their ABS market as investors jockey positions to take advantage of this. Their second offer is an exchange similar to what Viacom did recently. They are offering to buy back several of their off-the-run existing issues at a discount in return for new benchmark sized bonds. These are both signs of healthy and growing liquidity.

More than once you've heard me note the wide spreads and lack of liquidity in the REIT sector. CreditSights has published a relatively bullish fundamental piece this morning noting that REITs are "no longer focused on last resort measures of bolstering liquidity" and they have sufficient cash or credit to meet maturities through 2012.

Quick pop quiz....are any central banks raising rates? Yes, Israel did this morning from .50% to .75% .

While this certainly shouldn't come as a surprise, apparently the FDIC will ease their rules that had precluded private equity firms from buying banks.

To those that howled in protest over the government bailout of Citi, I will now respond "should we taxpayers keep the $11B we've made so far?" (story here)

While some may express surprise that Goldman, or any other firm, allegedly gave their opinions to certain clients but not all, I am not. Let's be realistic here.....in ANY industry, clients that provide the largest revenue streams get the best service. If you spend big bucks at an airline, you get the best food, best flight attendants and comfortable big seats. If you spend loads of dough at Saks Fifth Avenue, you get a personal shopper and an early look at the Tory Burch Spring collection. No one should be surprised or offended by this gradation....remember, they are opinions and only that.

Daily Commentary

Credit spreads are slightly better this morning as they blindly follow equities. Equities were obviously buoyed by Bernanke saying that the "prospects for growth in the near term were good."

We've seen four straight weeks of declining secondary volumes and this week is unlikely to break that trend. In addition, so far today only 1 smaller issue from Westpac has been announced.

There's likely to be little on the docket this week to drive spreads with the possible exception of the US Treasury auctions of 2 year, 5 year and 7 year bonds. I don't think the folks at treasury are thrilled with the timing of PIMCO's McCulley saying on Bloomberg radio this morning that the "big gains to be made in our lifetime in treasury bonds have been made." (more here).

FT Alphaville pointed out the ECB's lending survey data which shows that lending standards have eased back to the level of mid 2007.

If you're headed to the beach and would like some light reading, here are Bernanke's "Reflections on a Year of Crisis." from the recent central banker boondoggle in Jackson Hole.

The WSJ made reference to a recent S&P report that asserted 75% of all fixed income funds, including 98% of mortgage funds, have underperformed their benchmarks. While this ex-active buysider is certainly biased, the underlying indices in fixed income are very difficult to virtually impossible to actually replicate in the markets.

Existing home sales in the US were well above estimates driving stocks higher which in turn has credit spreads doing better this morning. While many are citing (whining?) about volatility in spreads being exacerbated by low secondary volume, the TRACE data shows that it's down only slightly. That being said, the tech/media/telecom names do seem to be gapping tighter on few actual trades.

Half of the recent mutual fund flow data was a continuation of recent trends; positive flows into high grade bond funds and outflows out of money market funds. However, it was a bit of a surprise to see both high yield bond and equity funds have outflows.

Earlier this week, I mentioned how a FAS ruling about off balance sheet securitization (being reversed) may hurt the banks. Apparently the FDIC is quite concerned about the impact as well...."the timing gives me heartburn" said their chief here.

Earlier this month, I had a post about prime mortgage borrowers defaulting at a higher rate than sub-prime borrowers. Here's more on that alarming trend from the Mortgage Bankers Association (tip from FT Alphaville).

Apparently, mom and pop can now 'hedge' (or speculate on) their real estate risk. Read about it in this Economist article.

The fact that corporate treasurers are being conservative with their balance sheets right now should not surprise anyone. This WSJ article will add some more data points to the argument.

The Vix has now had 7 days of opening up higher and closing lower....today's open was lower however. So much for my prediction that a base was forming....

Zerohedge points out that Goldman CDS has widened from ~100bps to ~150bps during August while the stock is about unchanged over the same time frame. Looking at a broader 3 month regression tells the same story (stock 'should be' lower or the CDS tighter) but with a weak R squared (~.51).