The T Report: Strength Across Almost All Credit Markets

All the CDS indices are better this morning.  IG, MAIN, and SNR FINS are all 2 to 3 bps tighter again today, and even HY17 is participating in the rally and is trading above 99.  HY17 has been a laggard, but has been outperforming the HY ETF’s.  Both HYG and JNK closed slightly lower yesterday but with fairly large moves into the close.  Hard to tell whether someone was painting the tape or put in a market order when a limit order would have made more sense, but in the context of hy bonds, the gap from 90.90 to 90.70 into the close is less than a ¼ point which is the absolute tightest bid/offer spread you will ever see in an individual HY bond, so if someone wanted to hedge some bond positions overnight by shorting some ETF, it was a small price to pay for the ability to sleep at night.

LQD was unchanged on the day which is a bit strange as TLT (and treasuries as a whole) were modestly higher and spreads were tighter so LQD underperformed.  We do not like the risk/reward in this ETF as spread compression is running out of room, and there is too much rate risk right now for our comfort.

IG18 is looking like a short here.  It is trading at 85.75, which is at least 7 bps rich to fair value.  That is a big differential, especially at these overall spread levels.  The next big move will have to come from single names and the richness will have to compress, so am comfortable setting shorts here as the next big equity move is more likely to see the richness go away, limiting how much tighter IG18 can get on a big positive equity move, and it could drift wider quickly on even small equity selling.  This is for a quick trade and isn’t a bet against the fundamentals of the US investment grade credit world.

Then back to Spain.  The Spanish 10 year bond is lower once again.  Today’s move is a little larger than other moves, but at less than a  ½ point it is still small, but is now down 8 days in a row and yielding above 5.25%.  It isn’t ringing alarm bells yet, but is becoming more difficult to ignore, and to the extent we wonder what a catalyst would be for another round of European Credit Crisis – the Spanish 10 year is an ideal candidate.

Greek defaulted and the world moved on.  My only 2 questions are why didn’t they do it sooner?  The market would have survived just as well had they done it last year, and the Greek citizens could have saved over €4 billion had they done the PSI before the December bonds.  The delay was costly to Greece, and totally unnecessary – it was always the net notional for CDS that mattered and the amount of bonds that investors held that would determine the risk to the financial system.  The other question is when does Portugal get its turn?  If it worked so well in Greece, why not do it in Portugal?  And in Portugal maybe they could do it so there is some net debt relief unlike in Greece, where they managed to pile almost as much new debt at a senior Troika level as they wiped out at the private sector.

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