Daily Commentary

Despite a blizzard of what most would call bad news, equities are up on the day and credit spreads are starting the day much tighter.

As more of these stress test results are allegedly leaked, credit investors are clearly starting to view this as an equity story, not a debt one; witness, bank spreads are largely unchanged today.

Demand for credit remains quite robust.  Today alone, we are seeing new issues from Goldman (non FDIC), Diamond Offshore, Encana and Florida Gas.  Goldman's decision not to use an FDIC guarantee will add an additional ~3.75% to their annual borrowing costs. 

While there is a FOMC announcement today, most are not focused on it.  Fed Fund futures have shown little volatility in last several weeks with a gradual move from ~20bps (implied) to the current ~15bps.  Obviously, with rates so low already, eyes are 'quantitative easing' measures at this point.  

It is important to remember that TED spreads have remained below pre-Lehman levels for several months now:

                             

One should also note that UK short term rates have fallen for 44 consecutive days.

I thought this article in the New Yorker was quite interesting.  It discusses the historical success rates of companies that actually increased spending (R&D, advertising, M&A) during recessions versus those that did not.  

Daily Commentary

Secondary credit spreads are moving wider this morning lead by the underperforming banks and brokers.  Continued concerns over swine flu and new 'tough talk' from the GM bondholders group have credit investors picking and choosing their spots carefully.

A big jump in the just released consumer confidence number could turn this around quickly.

The new issue market continues to be impervious to broader market worries.  Potash announced a deal this morning and had ~$2B in interest in 34 minutes before the deal closed.  Several regional banks have or will come to market soon with new debt deals.

The sectors that could be negatively impacted by a potential epidemic have low index weights so that has had, so far, a muted impact on the index.  Conversely, the healthcare/pharma sub-sector could benefit and has a much larger index weight.

I'm surprised that CDS outstanding has not dropped post the mid-April Big Bang protocol.

A hedge fund is making some noise that MBIA may have triggered a succession event in their CDS when they split the company.  This could cause some volatility in the name.

Obviously, most of the chatter this morning is about the banks/brokers and potential need for further capital raises.  Here are approximate spreads over treasuries, in basis points, for ~10yr bonds and the change in spread overnight:

JPM ~350 +10

WFC       ~370 +5

GS ~430 unch

MS ~465  +15

BAC ~565 +15

C ~605 +25

MER ~680 +30

Daily commentary

Credit spreads are following the equity market stronger this morning.  I'll leave the debate about whether this rally is for real or a dead cat bounce to more highly paid prognosticators.  

Geithner's comments on Charlie Rose and Citi's 'profit' are the most frequently cited reasons.  I intentionally used the quote marks around Citi's profit.....as almost anyone could show a profit if they didn't include writedowns, were allowed to dispose of bad debt, and had the ability to raise government guaranteed debt at almost a 0% rate.  

The lower Vix seems to have encouraged more issuers to come to market.  We saw ~$5B in non FDIC debt issued yesterday alone.  This brings March to ~$47B (vs Feb $94B and Jan ~$117B [includes FDIC debt]).  So far today, ETN and DIS are in the market with new issues.  For details, on Bloomberg type NIM3

The oft quoted, most liquid, credit index is the CDX (now series 11).  It's currently trading at a historically wide basis of 50bps (with the index being rich vs intrinsics).  You occasionally see odd technicals like this in advance of a calendar roll (mentioned yesterday).

The ICE has rolled out it's CDS clearinghouse this week.  This is REALLY BIG NEWS in the credit markets.  It may not immediately garner all the liquidity but it certainly has everyone's focus....including, most importantly, the Fed.  This is the largest single change to the credit market trading in years so please take your time to get up to speed on it.

  

 

Daily Commentary

Credit spreads have had a pretty volatile day so far starting out weaker but since recovering to slightly better.  I had expected a straightforward stronger opening this morning given the Chinese stimulus package and resultant equity reaction.  I suspect yesterday's down day on the Vix will not be repeated.

The new issue market was dormant only briefly.  Yesterday we saw over $11B in issuance from names such as KO, LLY and Cargill.  All are slightly better than where they were issued.  There were 2 small utility deals issued in the market this morning.  

GE spreads have been getting killed of late.  The CDS for GE are now trading 'points up front' which is typical only of very distressed names.  If you'd like a primer/explanation of 'points up front' please leave a comment on the site.  The NYTimes nicely summarized some of the prevalent worries in the name....largely unrecognized losses.

This month's Atlantic Magazine has an interesting article about how the crisis is impacting different areas of the country.  I was surprised to hear that NYC's financial jobs only make up only 8% of the overall job base....vs Des Moines at 18%, Hartford at 13% and Charlotte NC at 10%.  The national average is ~5.5%.

In a move reminiscent of days gone by, DeutscheBank just hired away 2 traders from BankAmerica.  This is notable for 2 reasons; one, the trend over the last 12-18 months had been to leave big principal trading firms for smaller agency only shops.  Also, these 2 guys (Sean George and Masaya Okoshi) were successful originally on the cash bond side of trading (not CDS).  Perhaps the days of the 25 year old quant jocks getting paid 2-3 sticks a year to trade CDS are over.       

Daily commentary

It's been a quiet mixed open for credit this morning.  Global equities were down slightly while swap spreads are slightly tighter.  Yesterday's equity move pushed the Vix higher in one of the largest one day moves in quite some time.  

Today is a heavy day for economic data so we'll likely take our directional cues from something in this slew.

Despite yesterday's markets, new issues from Dupont, Union Pacific and Coca Cola Enterprises were all successfully placed.  For full details, type NIM3 on Bloomberg.  Deals from Roche and Ameren are being marketed this morning.  

The negative basis (the measure of rich/cheap between bonds and CDS of the same name) moved inside -200bps for the first time since October.  When the basis is negative, as it is now, that means that bonds are cheap to CDS.  As this number shrinks and approaches zero, that means bonds and CDS are approaching fair value (to each other).  This tells me that the 'hot money' (hedge funds and dealers) continues to close out their CDS positions.

Former Fed Chairman Greenspan, he of fading relevance and influence, opined on possibly nationalizing the banks.  

The cheapest or widest sectors in the corporate bond market are currently REITs, diversified financials, insurance, financials and consumer/retail.

The richest or tightest sectors are healthcare/pharma, industrials, telecom, utilities and energy.