Jobs, showers and a point

There seems to be increasing realism in Europe. On one hand, the ECB buying of debt is actually having meaningful impact; perhaps it's fleeting but it's tangible at the moment. In addition, the talk of another round of European bank stress tests has the revolutionary idea of....gasp....using market values for sovereign debt.

The recently conducted Spanish debt auction resulted in yields that were a full 130bps lower than the previous auction. You can thank the ECB purchases for that....but before you yell "Ole!" please recall that Spanish gov't yields are still at historic wides versus German gov't yields.

On the matter of the coming stress tests, I discovered (via FT/Alphaville) a fancy interactive graphic tool here to input your own variables for a customized Euro bank stress test.

For those that watch retail investor behavior for leading but contrary indicators, please know that Morgan Stanley has set a record pace of issuance of structured notes to retail investors that are keyed off of interest rates. When mom and pop capitulate, it (name your sector/security/market) is headed the other way.

Ann Coulter, on the 'occupy wall street' protestors: "I am not the first to note the vast differences between the Wall Street protesters and the tea partiers. To name three: The tea partiers have jobs, showers and a point."

Be aware of Geithner on the tape today at 2pm on the domestic jobs bill and the European crisis.

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.

Daily Commentary

I'm a bit surprised that spreads are matching in lockstep with equities to wider levels.The Barclays Credit Index closed at +472bps (vs 3 month wide of 507 and tight of 424).

Morgan Stanley and George Soros both recently insisted that the bear market is not over.  I thought George Soros officially lost relevance in 1998 when he declared capitalism as flawed.    

A steady Vix, mixed swap spreads and bullish comments from the ECB (about possibly buying corporate debt) are usually enough to push spreads tighter.  I've heard from a few folks that there is a large SIV (structured investment vehicle) unwind going on in the market which may be enough to tip the scales.

Usually we hear about tighter regulation from politicians and aggrieved investors.  However, today we're hearing about tighter rules for money market funds from the investment managers themselves.  These changes sound likely to go through which will cause for further dislocations and odd technicals in the very short maturity bonds.....a quick drastic flight to quality.  

The PPIP program from the Fed was announced only days ago....and is now being expanded to include more managers.  Almost everything out of the Fed now feels ad hoc and soon-to-be duct taped.

There was some scary default data released recently.  High yield recovery rates (what's left after bankruptcy for creditors) have been ~10 cents for bonds and ~25 cents for loans this year; last year those were 39 and 55 cents respectively.  Moody's noted that their speculative grade default rate in Q1 was 7% (vs 1.5% Q1 '08).  They predict a peak of 15% during Q4 '09 with a 'recovery' to 12% in Q1 '10.  Remember that the credit market currently has a 45% default rate priced in to the market so buy buy buy. (JPM data; assumptions of 20% recovery rate, 10yr cohort).