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.  

      

    

Daily Commentary

Equity markets globally are rallying on the employment data and stress test results release.  Credit spreads are following suit.  The stress test results themselves were little different from the leaks thus the relief rally result; markets can handle good news and bad news but not uncertainty.  

When equity investors can rattle off the bid-to-cover and tail of a 30yr treasury auction, you know it went poorly.  As deficit spending skyrockets, each additional basis point being paid out by treasury on coupons will haunt us in the future.  Treasury yields will be the 'de rigeur' subject-of-the-day going forward (replacing the TED spread and Vix).   

The new issue market continues to churn along successfully.  Morgan Stanley and BoA both have been in the market with non-FDIC guaranteed deals; likely as a necessary precursor to repayment of TARP funds.  Hasbro and CBS are 2 of the non-finance names currently in the queue.  Credit investors were also enthusiastic about WFC's smooth and successful equity raise.

To remind you why new issues are flying off the shelf, I will cite the $52B in inflows into bond funds this year which is ~10% of the assets under management industry wide. 

In another encouraging sign for consumer spending/finance, AXP needs no further capital and intends to pay back it's TARP money.  Personally, I was a bit surprised to see the MET is in the same boat.  

Whenever credit investors feel too giddy, all they need to do is catch up on Nassim Taleb's latest utterances....the author of the book Black Swan told a conference in Singapore that this crisis is "much worse than the 1930's".  This is the same guy that said yesterday debt should be banned.  

Perhaps I haven't had my eye on the ball, but I was surprised to hear Weyerhaeuser was cut to junk by Moody's.  S&P still has them rated investment grade.  Spreads on the name did not react but expect some selling pressure as many funds will be forced sellers due to client guidelines.    

I found the following explanation of the growth of risk during this bubble to be quite succinct (from WSJ editorial):

"First, businessmen seek to maximize profits within a framework established by government. We want businessmen to discover what people want to buy and to supply that demand as cheaply as possible. This generates profits that signal competitors to enter the market until excess profit is eliminated and resources are allocated most efficiently. Financial products are an important class of products that we want provided competitively. But because risk and return are positively correlated in finance, competition in an unregulated financial market drives up risk, which, given the centrality of banking to a capitalist economy, can produce an economic calamity."