Daily Commentary

Credit spreads are rallying this morning despite the stories about enormous amounts of capital needed to prop up the banks.  Investors continue to believe this is an equity story; witness BAC/C/MER spreads are all tighter by 15bps this morning....JPM/WFC/MS/GS are tighter by 5bps.  

The forward economic picture seems to be improving.  JPM just upped their Q2 estimate for GDP to -.5% (up from -2%) with Q3 positive at 1%.  Bernanke highlighted areas of economic strength during his talk yesterday. 

The technical demand picture remains very clear and strong.  Yesterday, Teck issued ~$4B in the high yield space; those bonds are up $5 since yesterday.  On the investment grade side, Xerox, Husky Oil, DTE Energy and Canadian Oil Sands are all in the market with new issues.  With 75% of the S&P 500 having reported, expect this pace to pick up very soon.

Historically, liquidity in REIT debt has been terrible; this was true long before the real estate bubble burst.  Treasurers at these companies are now realizing that they can buy back their debt very cheaply making these bonds even less liquid (remember, liquidity must be viewed symmetrically).  This could give their equity a boost as the balance sheet strengthens.  

There is an interesting civil case before the court in NYC.  The SEC is charging some folks with insider trading; this is notable as it is the first time CDS was the instrument being used.  The defendants lawyers argue the SEC does not have jurisdiction.  Clearly, the regulators are making this an area of focus.  You'll note that the NY Fed has recently been talking about trying to break the dealers' stranglehold the CDS market.

Take a look at these current and historical spreads by sector (from JPM) and you'll see that credit has actually underperformed (click on the graphic once to enlarge it):

Daily commentary

Spreads are tighter this morning after yesterday's blockbuster issuance day and overnight global equity market strength.

I'm not seeing a ton of focus on this in the credit markets yet but the CRB hit 6+ year lows yesterday.  

Yesterday's $20B+ in new issuance (ex FDIC gtd) in investment grade debt was the highest 1 day total ever.  Roche issued $16B across 6 tranches.  While the deal came 'cheap' to existing secondary spreads, all tranches this morning are 30-50bps tighter than issued spread.  If I were the Roche treasurer, I'd inquire about the ~$60 million they left on the table.  Sometimes, if you want the deal to sell quickly, that's the price you pay.

Lipper data showed $14B in inflows into bond mutual funds in January.  This obviously drove the enormous demand for new issues last month.

Bank of America made the first TARP payment back to the government....granted it was only $402mm of the $45B they received but it's notable nonetheless.

The "Big Bang" for CDS is coming soon.  The governing body, ISDA, is about to propose a set of rules in advance of the eventual move to a central clearinghouse.  We should see the full proposal well ahead of the March 20th quarterly roll.  JPMorgan is predicting fixed coupons (either 100 or 500bps) and the elmination of ModR in favor of NoR.  When the proposal is released, I will write a separate piece about it.  In the meantime, if you have granular questions, please send them to me.

There are 3 primary competitors right now for the CDS clearinghouse.....ICE, NYSE/Euronext, and CME/Citadel.  ICE seems to have the most dealer support....and as I've said before, you cannot have liquidity without capital.