European corporate and financial CDS indices continued their gains. Italian bonds are up a little since the downgrade. Spanish bonds are also marginally better. The Portuguese 10-year bond hit a new low yesterday (in price terms), and although has bounced a bit today is still down 6 points from Friday and is trading at 50.5% of par.
There is continued focus on how well auctions are going. Given LTRO, political pressure, and ECB involvement in every phase, this isn’t surprising. It definitely isn’t bad, but isn’t a clear indicator of deep demand. Greece had “successful” auctions in early 2010. This summer was punctuated with multiple stories of how great Italian auctions were. An okay sign but definitely not an “all clear” indicator.
As Greece meanders towards some form of an agreement to try to agree on some PSI agreement this week, we may rally further, but again, it won’t be a done deal. The “creditor committee” negotiating with Greece may control less than 60 billion of the 200 billion or so that is eligible. Somehow I don’t think they will conclude anything, but they are too scared of a non-controlled default, that they will take an “agreement in principle” back to their members and we will have to wait a month or so to see what it actually looks like and who agrees to it (which if that sounds a lot like the mode we are currently in, that is because it is).
Portugal is worth paying attention to. It “only” has €130 billion of debt outstanding, so is small compared to Greece, but it will be a good indicator of how easy it is for the Troika to maintain that Greek “haircuts” are an isolated event. Hungary, with “only” about €65 billion is also out there, just beyond the radar screen.
The newly downgraded EFSF sold bills successfully today, but that is not surprising given that they were only 6 months. The low yields serve a purpose, but I think EFSF is supposed to borrow as long as possible while it can, otherwise it will continue to add to the potential near term liquidity problem while do nothing for the solvency problem.
The High Yield bond market has been pretty complacent. It has been given every excuse to rally: $1.5 billion of inflows into the main HY ETF’s, flows into traditional mutual funds, incredibly low dealer inventory, and a calendar that is being digested easily (it is hard to get allocations). It really hasn’t “ripped” higher yet. Maybe today we finally get the liftathon everyone has been expecting.
HY17 is up early today, but I would really like to see the HYG NAV shoot higher as it would indicate that finally real money was being put to work in real size. Part of the problem may be that it is difficult to find anyone who didn’t like high yield already. Sovereign problems, QE, and decoupling all kept people pretty fully invested in this market.
Financials may finally be ready to take off? The one area that is underinvested and cheap that will directly benefit from Fed involvement is financials. They may finally start to perform and could do better than equities which had been off to a fast start (though JPM’s mediocre earnings, and Citi’s weak earnings, that may change).
I continue to like HYG, HYG vs HY17, BABS on a hedged basis, and am tempted to play financials here. IG17 may be decent short against these. It is trading better today, but doesn’t feel particularly “squeezy”. If anything at 5 bps rich and so many investors having bought into the long US, short Europe trade, a period of underperformance could well result. This about the 3rd day in a row where arguably the news out of Europe is better than the news out of the US, and I think the positioning is dead opposite of that.