Daily Commentary

On Wednesday, yields rose and spreads rallied.  On Thursday, yields fell and spreads rallied.  Today, yields are about flat and.....spreads are rallying.  Here's some context on the all-in yield, not just spread, of the credit market: (source - JPMorgan)

Bloomberg news has an interesting perspective on the PPIP program for bank's 'toxic' assets.  The gap between where banks have these assets marked on their books versus they could sell them (into PPIP) is ~$168B.  This dwarfs the amount of capital that the Feds have told them to raise as a result of the stress tests.  I will be attending the PPIP conference in NYC next week to hear more.    

There was $5.7B in issuance yesterday including Citi (with FDIC wrap) and BoA (without FDIC wrap).  The new issue concession spread is now back to pre-crisis levels.  This is the difference, in basis points, between where a new issue is marketed versus their outstanding bonds in the secondary market (before the deal was announced).

I find it interesting, and a bit disconcerting, that last week saw inflows of ~$14B into money market funds.  This is in stark contrast with the weekly average this year which has been an outflow of ~$6B.  What were these people fleeing?  Were they concerned enough to accept only a few basis points in return for safety?

Bonds issued by highly rated universities have been quite popular in the last few years.  They were peculiar in the sense that they were sometimes issued and traded by the muni desks at the dealers and marketed to muni accounts.  Just as often, these deals were issued by the taxable corporate desks, traded by them and marketed to taxable accounts.  Recently, the ratings agenices have put these universities on negative watch due to dwindling endowments.

In another sign that this rally is 'real', the negative basis of the market continues to narrow.  It currently stands at -140bps having spent much of the last 6 months in the -200 or wider area; pre-Lehman the level was ~140bps.  As a reminder, this basis is a measure of rich/cheap between cash bonds and their derivatives.  When the basis is negative, cash bonds are cheap to derivatives.  As this basis becomes less negative, cash bonds are outperforming.

I'm not surprised that the dealers are pushing back against potential derivatives legislation.  See my earlier post about how TRACE killed dealer's profits.  

      

    

Stronger equity markets and higher risk free rates are keeping credit spreads firmer today.  The majority of credit investors were taciturn, at worst, in their reaction to the GM news.

The recent and rising all-in yield for credit has insurance account buyers eager to participate.  In addition, Moody's dismissed immediate concerns about the AAA rating for the United States.  My favorite pair trade to watch remains the US Government vs Campbell's Soup....CPB has gone back to trading 20bps through (i.e. richer).

The new issue market continues to be a shining beacon for credit.  Goldman is in the market with a $1B 10 year bond (actually a re-opening of an existing deal).  This deal is non FDIC guaranteed;  it's obviously encouraging when those deals are clearing easily without government support.  NSC, TLM and possibly MASSMU are also on the launch pad.

I'm surprised that Chevron spreads (and equity) have not yet reacted to this story about a huge potential liability. 

I'm not surprised that the banks want be on both sides of the PPIP program.  Remember, this is an effort to remove 'toxic' structured product from the banks balance sheets.  I suspect a rash populist political solution will soon be imposed.   

While I generally agree with the precept that the rules for the credit default swap market have successfully weathered many tribulations, I still worry about stories like this.  It shows that there is still room for obstreperous litigation or financial engineering.

The insurance sector has rallied dramatically in the last few days.  There seems to be little new news on the fundamental front and I would, perhaps naively, attribute this strength to 2 recent 'cheap' new issues (ALL and AFLAC).  I would note that Allstate credit spreads are trading very rich versus the equity....CDS is 'predicting' an equity level of ~$36 (vs current ~$26).   

Daily commentary

The equity and credit markets are opening in slightly different directions this morning.  Credit spreads are slightly better as most credit investors realize employment figures are backward looking.  By nature, most credit investors are pessimists so it's only a 'bad' number if it's worse than expected.  I suspect, and hope, that credit investors are more focused on some consumer stabilization combined with sharp production cuts....or perhaps lending picking up in the UK.  

As I've mentioned previously, this recent easing by FASB of the mark-to-market accounting rules will help the financials.  Naively, I hope they reverse the ruling once this crisis passes as it's oft shelter for accounting shenanigans.

The FT's Lex, and others, have noted the irony in the recent interest of the banks in investing with the Fed's PPIP toxic asset program....yes, the same program that is allowing these very same banks to divest of their toxic assets.

The demand for credit continues.  Mutual fund flows into credit funds YTD are +$32B which is ~6.4% of AUM.  Contrast that with equity fund withdrawls of ~2% of AUM YTD.  Also, non traditional investors continue to express interest in buying distressed assets.   

Chapter 11 filings have been occurring at an increased pace.  To high grade investors, they largely pass unnoticed.  However, a recent filing by Idearc, has had wide, but not deep, repercussions.  Idearc is considered a 'successor' (in CDS terms) of Verizon.  Verizon was widely represented in the CDX investment grade credit indices.  Therefore, Idearc too had a tiny footprint in those same indices.  The notional amount for CDX indices 1 through 7 all must be adjusted slightly.  I note this as it serves as a reminder of the complexities of the credit derivatives market and how a seemingly unrelated event can have repurcussions in places you wouldn't expect.  For equity investors, imagine having to change the terms of the next 7 S&P futures contracts....systems, compliance, rich/cheap models....all have to change their inputs (albeit slightly).  The derivatives ops folks are busy today.