Daily commentary

We remain stronger on the day post the Fed's TALF announcement. This ABS centric program had always had one of the more positive taints of all the Fed programs.  At first glance, it seems to focus on "newly" or "recently originated" securitizations which could could hinder it's ability to help out the owners of the older more toxic deals.  Credit spreads were essentially unchanged on the announcement.

The Barclays Credit Index closed last night at +456bps.  The 3 month wides were +545 and the tights were +424.

New issue volumes remain muted due to volatility and earnings releases.  The only non FDIC deal on tap today is for Coca Cola (KO).

Secondary volumes were largely unchanged from January through February.  

Over the last few weeks,  lower quality credit has outperformed higher quality credit.  This is partially attributable to the banks (i.e. because of the FDIC wrap, they're considered higher quality [for now]).

Scanning JPMorgan's excellent cross asset class research, I noticed 2 equities that are 'underpriced' (if you believe CDS and equities are correlated).  CNA (should be ~$15) and MDT (should be ~$33) show up with high Z scores and healthy R squareds.  

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).