Daily Commentary

Yesterday afternoon's weakness has extended overnight into today's session despite global equity strength. Recent heavy supply, a higher Vix and a sobering report from the Congressional Oversight Committee are the driver's of today's move. Recent new issues, especially in the financial space, have weakened from where they came to market.

The Congressional Oversight's report (here) noted, correctly I might add, that the mark-to-market accounting rule changes only temporarily comfort a bank's balance sheet...they do not actually remove the problem assets.

Gadfly Nassim Taleb was on CNBC this morning making a similar case in his oh-so-subtle way:

"We still have a very high level of debt, we still have leadership that's literally incompetent ...They did not see the problem, the don't look at the core of problem. There's an elephant in the room and they did not identify it."

Our brethren in high yield saw an especially heavy issuance yesterday with ~$3.7B in deals coming to market. This is the highest daily amount in 3 months.

There are 2 news items that many are reading as we await the FOMC decision today at ~2:16pm EST. Most importantly is the Obama administration's proposal for derivatives regulation (PR release here, full legal document here). So far, I don't hear the dealers (via ISDA) howling about any particular bullet points.

Today's other summer reading veers towards human interest...or perhaps tragedy. Here is the NYTime's story about Madoff's "aide" DiPascali admitting guilt.

Daily Commentary

The wave of supply is finally starting to meet some slight resistance and spreads are meandering wider. New deals have been coming with little or no discount to existing secondary bonds. While these slightly lower yields are attractive to issuers, they are becoming slightly less so to buyers.

Investor attention this week will largely be on the enormous treasury auction calendar and the FOMC decision/commentary on Wednesday. One should note that Geithner may ask to increase the federal debt limit. Secondary volumes in credit are reflecting that with their usual low August volumes.

Chris Watling of Longview Economics (via The Economist) notes that because corporate spreads lead equities and they are still historically cheap, we have room for equities to rally further.

For those of us used to the illiquidity in secondary corporate bonds, this story griping about the weakening liquidity in (far more liquid) credit default swaps may cause some whining.

Warren Buffet, he who once told us that derivatives were "weapons of mass destruction", seems to have been dabbling in the equity and/or mezzanine tranches of the high yield CDX index; and I'd add that he was not particularly successful. These are not exactly the plain vanilla type of securities where a neophyte derivatives trader should begin. Perhaps he should have read this primer first.

I've noted more than once that credit has been a one-way trade in the last several months. Take a look at this broker's comment about the Bank of England on their efforts to buy corporate paper:

The recent rally in credit indices has coincided with fewer bonds being offered, culminating in no bonds being offered in any auction during the week ending 31st July. As the amount offered has declined it is not a surprise that purchases by the Bank in recent weeks have come almost to a standstill, with a grand total of one bond bought over the past three weeks, amounting to £3m nominal.

Here is an conversation, actually an interview, between 2 very unlikely former adversaries....Henry Blodget and Eliot Spitzer.

The news that State Street's legal fund/reserves may not be sufficient has largely been ignored by the credit markets. However, I should note that STT is not particularly liquid in credit at all to begin with.

Daily Commentary

Welcome to new issue Monday. So far, 9 new issues have been announced this morning and more are expected. For details, type NIM3 on your Bloomberg. Spreads are so far resilient in the face of this supply holding largely unchanged. As I've said before, demand exceeds even heavy (daily) supply such as this. Take a look at this JPMorgan graph showing net supply YTD:

In other news, everyone's favorite uncle from Omaha, Warren Buffett, continues to buy corporate bonds as cited here.

Bloomberg news notes that corporations are hoarding more cash than ever before; largely at the expense of stock buybacks.

I first started mentioning concerns about commercial real estate back in February. It has now elevated to Fed chairman Bernanke list of concerns as something he is paying "close attention" to; perhaps signaling a bottom?

The potentially very lucrative business of clearing credit default swaps has attracted many strong competitors. This article highlights that ICE has taken the initial lead over CME/Citadel and Eurex. Hopefully we won't have a BluRay vs HD DVD type battle here.

Return readers will know that the Vix has recently become a cause of concern for me. This article is perhaps a bit more dire with the title "Vix Signals S&P Swoon".

This blog post had me a bit perplexed this morning; it maintains that sub bank spreads are trading better than senior spreads. All the actual individual spreads I am seeing live do not bear this out.

Daily Commentary

With AIG making money and unemployment easing, all seems well in the world of credit investing.  Spreads are tighter on the day and given the beautiful weather on the east coast, I suspect many of those investors will soon be leaving the office headed to their summer homes.  There are no noteworthy new issues in the queue today. 

The data showing the incredible demand for credit continues.  The natural demand picture, according to JPMorgan, for July showed ~$67B in coupons and maturities paid versus only ~$24B in new issuance.  Also, the recent mutual fund flow data has inflows into credit funds accelerating at a pace ~20% above the YTD average.  

Perhaps yesterday's kerfuffle over AIG risk was not about the tenuous link to Radian's earnings but good old fashioned frontrunning or an earnings leak.  After today's actual earnings report, AIG bonds are up another $2 (on top of yesterday's $5).  

Morgan Stanley paid back their TARP money...or more accurately repurchased their own warrants back from the government.  I found it interesting that they drove a better deal than Goldman (as noted here).

As I noted earlier this year, CSFB bankers were "livid" about receiving their bonuses in the form of their own bonds/deals that they created.  Apparently, they aren't so livid anymore as these bonds are doing very very well (story here).  

For those government conspiracy theory fans, here's a interesting blog post about the US Treasury issuing bonds at auction and then buying almost half of those same bonds back within the week.  

While I am clearly not a technical analyst or chartist, I'd be curious to hear if the techies agree with this layman's opinion that the Vix is forming a base by not setting new lows.  Given that it's opened lower, perhaps this requires further review.

Daily Commentary

Welcome to the abbreviated (due to travel) afternoon version of the Daily Commentary.

I'm a bit flummoxed how equities can be weaker, swap spreads wider, the Vix is higher....and yet spreads are tighter.  If forced to cite a possible reason for today's strength, I'd choose the Bank of England's expanded quantitative easing and a massive short covering rally in AIG risk (all forms).  

AIG bonds are up ~$5 on the tenuous (my term) link between it's business and Radian's recent strong earnings.  "Analysts weren't sure" was the WSJ's response.

Here's the local take on the increased and expanded intervention on behalf of the Bank of England into their government bond market.

Everything Jeremy Grantham writes is a must-read for me...here's his latest about the conundrum of what to do when you're at fair value.

Regulatory inquiries into credit default business practices are popping up as frequently as lice outbreaks at summer camp.  Today's recipient was Goldman Sachs...they of 46 separate trading days of $100mm profit each.   WSJ coverage here.  

Demand for new issues continues...unimpeded even by the summer doldrums.  When 2 REIT deals (from SPG and DRE) clear smoothly, that's a robust market...as REIT's have long been the least liquid sector in the corporate bond market.

Cash bonds continue to outperform (their own) CDS as seen here in this graph from JPMorgan.  You'll note that this negative basis has 'recovered' to pre-crisis levels.  

Daily Commentary

Rising yields have trumped weaker stocks and as a result credit spreads are unchanged to slightly better this morning.

There are several smaller new deals (or re-openings) in the market today as demand remains quite strong for new issues. DOW brought a deal yesterday and those bonds are already 30-40bps tighter than issue spread.

While I've largely been highlighting the bull case for credit, here are 2 mainstream stories with more of a bearish tone on credit. Reuters has a fairly thin article about a potential pullback in spreads (CNBC's headline for the exact same story says "rally may be over"). Bloomberg has a more substantial article noting the CCC rated bonds are up 80% since March lows and are now overpriced (along with other lower rated bonds).

Please forgive me once again for delving into mortgage land as that is clearly not my area of expertise. However, I suspect we should be a bit concerned by the news that prime borrowers defaulted at a much higher rate than subprime borrowers in Q1.

Perusing the DTCC data on CDS outstanding I noticed 2 interesting data points. Berkshire Hathaway, as an issuer not investor, has 6x more net CDS referencing it than it does public debt outstanding. The largest absolute amount of (net) CDS outstanding is GE with ~$11B; the next closest is BAC with only ~$7B.

Daily Commentary

The trends that were in place when I went on vacation remain firmly there upon my return. Strong demand continues to drive spreads tighter and support a healthy new issue market despite lower overall yields. I could go on with other indicators...LIBOR at historic lows, TED spread is back to pre-crisis levels, and lower quality paper spreads are collapsing towards higher quality names.

Using mutual fund flows as a proxy, demand for high grade bond funds was ~35% above average for the last 2 weeks. This is mirrored by outflows being ~35% above average for money market funds over the same time frame. Bloomberg News noted that corporate bond issuance in Europe has already hit an all time annual high of $1.1T even though we've just entered August. Just today, GE announced a deal in the US and demand was >$2B within approximately 30 minutes of the announcement.

The Atlantic Magazine business blog has a comprehensive post about the possible tightening of mark-to-market accounting rules and how this could have a large negative impact on the banks. Please note this post in March noting the easing of these rules....was it coincedental that this was around the time that the lows in the market were set?

Malcolm Gladwell wrote an article in the most recent New Yorker about how the psychology of overconfidence may have driven, or exascerbated, the credit crisis.

The exodus of experienced salesmen and traders from large investment banks to agency-only or boutique shops is well known within the community. Here's Bloomberg's take on the shift....I have a quibble with the use of the term "fired" in their title as many of these folks left on their own volition.