Daily Commentary

Spreads are modestly tighter today in sympathy with higher equities. Yesterday's pop in the Vix will likely keep any spread rally capped.

Credit investors remain focused on treasuries and the Fed this week. We have 2yr, 5yr and 7yr treasury auctions for ~$100B this week in addition to the FOMC announcement tomorrow at 2:15ish.

Yesterday, I noted that European investors switched to fixed coupon CDS yesterday mirroring the US market. However, I neglected to note that the European market will have 4 different coupons while US investors will suffice with just 2. This is yet another example of how homogeneity seems to be difficult to achieve in this sector.

Continuing a positive theme, to credit investors at least, Royal Ahold announced a debt buyback this morning.

Life insurance spreads are getting crushed this morning without any real fundamental news to speak of. I've noted their recent rally in spreads over the last few months; look at Allstate which has rallied from ~400bps in March to it's tights earlier this month of ~95bps. It's currently trading ~120bps.

I'm encouraged by the Merck new issue which is ~10-15bps tighter than where it was issued yesterday. They were able to cover all their takeover financing needs (for SGP) in one fell swoop.

CMBS spreads have had quite a volatile year; from early March until early April they had rallied from ~800bps to ~400bps on news that the Fed's purchase program would be expanded. However, fundamental concerns about the sector have been around for quite some time. Those concerns received more press today here.

Here's another story to add to the pile of my posts on "appetite for risk is back".....Byron Trott was able to raise $2B for his new private equity firm.

If you simply regress the credit markets (using CDX) and the S&P 500 for the last 3 months, there is little diversion (Z score of 0 with R^2 of ~91). However, if you regress those same 2 data series for 1 year, credit spreads are predicting an S&P of ~1100. So, if you think this environment is the new paradigm, then everything is 'fairly' priced. However, if you think this market is just temporary, then either credit spreads need to go wider or the S&P needs to higher (or some combination therein).

Today's anecdotal sign of the economy remaining weak....I called a few contractors yesterday afternoon looking for some minor drywall work to be done. All 3 called back within 1 hour and the guy I chose arrived this morning at 7:30am.

Daily Commentary

A higher Vix, lower equities and continued lousy weather on the US east coast have combined to push spreads wider this morning.

Volumes should be somewhat subdued today as they were Friday due to today's quarterly CDS roll and today's European conversion to fixed coupon CDS. Yes, this may force more operational and/or clean-up CDS trades but will likely distract many from making tactical or strategic trades.

Merck seems to be the only new issue in the market today. Remember, the new issue premium has shrunk back to almost zero reducing the relative attractiveness of new issues.

Despite continued unrest in Iran and the US Navy's tailing of a North Korean ship, the headline gathering the most attention is the possible overhaul of the repo markets. Like the CDS market, this function in the market has long been controlled by the tight duopoly of JPM and Bank of NY. Credit spreads in those 2 names are wider in line with the rest of the market. This function was one of the many bogeymen that were cited as contributing to the liquidity problems during the credit crisis.

In JPMorgan's weekly credit piece, they point out the relative attractiveness of negative basis trades despite the recent narrowing. They cite steep short term interest rate curves and increased available leverage as some of the primary drivers of increased ROI. How does this impact you? Expect the negative basis to continue to narrow as cash bonds will (theoretically) outperform credit default swaps.

William Poole, formerly a Federal Reserve governor, made an interesting comment:

“Goldman is to be congratulated for seeing the problem ahead of others and protecting itself from the impending failure of AIG....It’s not the responsibility of any private firm to determine what the public interest is -- that’s why we have a government.”

I agree with him. From the perspective of an investment management firm or broker, prudent risk management often entails insisting on margin or closing positions where margin may be insufficient. These always translate into cash calls for the targetted bank/broker. Can prudent risk managment = a run on a bank?

Many bloggers have taken up the thesis that LIBOR is no longer relevant. Here is a fairly good summary of the arguments.

Daily Commentary

I'm travelling today so this will be very brief.

Spreads are tighter on the back of stronger global equities and continued demand for credit bonds. This weeks mutual fund flow data once again showed huge outflows out of money market funds into the riskier asset classes.

Given all the scrutiny over true over-the-counter securities (think credit default swaps), I can't say I'm too surprised that the SEC is coming after 'dark pools.'

Beware of strangers bearing gifts on triple witching day.....especially if they are worth $134B.

Daily Commentary

Spreads are opening up wider this morning. While I could cite mixed global equity markets, I suspect it has more to do with rising 10 year yields and the rating agency S&P.

On the same day that 10 banks paid back their TARP funds, S&P downgraded 18 banks with 5 of them going to junk. Not surprisingly, bank spreads are wider this morning (but off their wides). Yes, I acknowledge that the TARP payers are mega-banks while the S&P targets were much much smaller.

Somewhat thankfully, S&P announced it's AAA rating for the United States is safe for some time.

On the matter of the 10 year and it's yield, a few pundits are predicting continued higher yields.....Dan Fuss of Loomis Sayles is predicting a 6.25% yield in the next 4-5 years.

The new issue market remains subdued with LO and LNC the only notables with 'live' deals pending.

For you equity folks watching the rally in HMO stocks, please note that their spreads

are not following suit tighter.

While I should have noticed this yesterday, I am very surprised to hear that the rating agencies were largely left untouched in this proposed financial regulation overhaul.

This is a thoughtful, and wordy, perspective on how AAA rated 'risk' became a proxy for systematic risk and when participants realized that there was only a 1 way trade in that 'risk', the panic set in.

The New Yorker's James Surowiecki has an interesting article about the impact, or lack thereof, of oil prices on the broader economy. One excerpt:

"historically, sharp spikes in oil prices have sent consumer confidence plummeting, and have led to outsized cutbacks in general consumer spending. This makes sense: gasoline prices are the most publicly visible prices in the economy as a whole—no other prices are displayed on the street in bold, two-foot-tall numbers—so it’s not surprising that they have a disproportionate impact on the way people feel."

Daily Commentary

Once again, a combination of wider swap spreads and weaker global equities are pushing our spreads wider. Fortunately supply remains light and technical demand remains strong so the damage should be limited. Financials are the underperformers as they are the most relatively liquid sector and therefore are first bonds folks try to sell (because they can).

The ratings agency continue to play catch-up or look backwards. Today's mid-game rule change involves bank hybrids which may lead to the downgrade of ~75% of that sub-sector by Moody's. Insurance hybrids are down on the day in the fear that they may be next.

Morgan Stanley will be re-structuring it's market leading prime brokerage group to assuage the fears of those that watched some of Lehman's PB assets get claimed in bankruptcy.

Secondary volume was heavy yesterday with the dealer sell vs. buy ratio heading back towards it's usual 3x. Recent new issues from DT and CMCSA are wider from where they priced while the TITIM issue remains firm.

Bloomberg news has a story about the recent insurance spread rally that I've mentioned before.

Once again, George Soros feels the need to get himself in the news....this time is 'how to reform'.

Daily Commentary

Wider swap spreads and a higher Vix are pushing credit spreads wider this morning. Quite obviously, the Vix is higher thanks to yesterday's weakness in the equity markets. However, one will note that the gap between the Vix and the MOVE (US Treasury volatility), noted earlier, is indeed narrowing. One investor has made an enormous bet that the Vix will continue to spike.

Proposed regulation for the ABS market is likely to be sending shivers down many spines. One of the proposals is to start reporting ABS trades on the TRACE reporting engine. As I've noted many times, TRACE killed the dealers profit margins for corporates driving their exodus from that market (at least as far as dedicated capital). Regulators think that transparency brings liquidity to some sectors, I think the exact opposite is true. Here you can read Geithner and Summers 'case for reform.'

Given the rally of the last month in spreads and the more recent shorter rally in US Treasury rates, it's helpful to note that all-in yields have fallen almost 50 basis points in the last month. This will obviously diminish the overall attractiveness of the market especially to insurance accounts.

While secondary volumes were light yesterday, new issues have about a 2 week window before the 4th of July and earnings season. So, yesterday we saw ~$5.2B in supply and so far I'm hearing of TITIM, DT, and CMCSA all coming to market.

Hopefully, you will recall that I've noted that the appetite for risk is back. As a result, or coincidence, hedge funds not only had their best month (May) in years but also saw inflows for the first time in 10 months (source - here).

In March, the UK government had a failed gilt auction. Today, they've decided to syndicate their debt (a la corporates) for only the second time ever. The result? Oversubscribed.

Daily Commentary

Weaker European equities and a treasury rally have credit spreads slightly wider this morning.

A lack of new issue supply early in the week should keep a cap on further widening in the United States. Europe is seeing supply in the bank space this morning.

That being said, the geopolitical scene (Iranian elections, Netanyahu, and North Korea come to mind) could cause further agita for the markets.

The technical demand picture still looks strong as inflows continue into high grade bond funds largely at the expense of money market funds. However, the dealer sell vs buy ratio has crept down a bit....a trend to be watched.

JPMorgan notes that in this downturn, corporate profits have 'only' fallen 13.4% versus the drop of 28.9% in the 2001 recession. This is thanks to heavy cost and job cutting. In addition, the pace of stock buybacks is down ~60% versus last year.

I'm heartened by the interest in securities down in the capital structure which further fortifies the view that risk appetite is back.

Call him irrelevant, hypocritical or pandering to populism....George Soros is calling for credit default swaps to be outlawed.