The T Report: A mixed and dull open

Posted by on Mar 19, 2012 in Uncategorized | No Comments

Asia was mixed, with Hong Kong down noticeably, but Chinese markets okay. Europe is pretty much down across the board, with the exception of Spain doing well. US Futures are mixed, with AAPL helping Nasdaq remain positive.

On the Credit Side, the story is similar. European corporate are better with XOVER continuing its impressive performance – it is compressing with MAIN and doing much better than HY17. Sovereign CDS is a touch wider across the board, as are financials. No real trend to watch, and with the roll coming up tomorrow, we will probably see very limited trading ahead of that (single name CDS and most indices “roll” tomorrow – an archaic legacy that forces people to roll their existing trades into the new “on the run” date or face problems getting decent liquidity.

The Hellenic Republic CDS process is going on right now. Initial indications are that it will settle around 22%, which is in line with where the new long dated post PSI bonds were trading. Open interest on the “auction” where people can buy or sell bonds against their CDS seems very small at just over €200 million. So nothing much should change. Will the market be soothed by how smoothly this seems to be going? Possibly as too many people were still worried about gross notionals and the potential for a daisy chain of counterparty defaults – in spite of how unlikely that situation was.

The Spanish 10 year bond continues to struggle. It is holding on to small gains right now, but looks ready to slip back to a loss. The Italian 10 year is a solid 5 bps better this morning. This separation is important to watch. The 10 year yields are now 5.17% for Spain versus 4.80% for Italy. We never understood why Spain was trading better than Italy earlier this year – other than the Spanish bond market was so much smaller that it was more easily manipulated by central banks and banks. It is starting to separate and as more attention is focused on Spain, it doesn’t stand up well to the scrutiny. The headline debt to GDP is fine, but that hides so many other issues there.

As Portugal becomes a likely candidate for a PSI of its own, more and more concerns about Spain will develop. Italy seems immune right now, but how long that lasts is also a concern. Eurozone construction spending is curious to look at if nothing else. The headline was -1.4% YOY, but while Germany was up 6.5%, Spain, Italy, and Portugal were all down double digits. They need a construction spending LTRO?

Friday saw small inflows into HYG and JNK, but I suspect that it was “arb” activity rather than new retail flows. The premiums on HYG and JNK got pushed down a lot. I still like the long HY17, short HYG/JNK trade. It performed extremely well on Friday with HY17 creeping up throughout the course of the day, and HYG dropping most of the day after having sent out the note. LQD should still be avoided.

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ETF/ Closing Daily Weekly Indicated Premium/ Fund
Index Price Change Change Yield NAV Discount Size (Mil)
HYG 90.49 -0.33% -0.21% 7.12% 90.35 0.15% 14,316
JNK 39.57 -0.05% -0.02% 7.15% 39.49 0.21% 11,904
HY17 98.38 0.00%

LQD 114.57 0.17% -2.01% 4.22% 114.32 0.22% 19,706
IG17 88.00 -0.25 0.00%

MUB 107.92 0.42% -1.56% 3.18% 108.18 -0.24% 2,817
BAB 28.70 0.03% -0.73% 5.22% 28.76 -0.21% 862

AGG 109.28 0.01% -0.91% 109.28 0.00% 14,840

TLH 126.88 0.08% -3.43% 2.47% 126.83 0.04% 419
TLT 111.43 0.22% -4.54% 2.87% 111.19 0.21% 2,886

MAIN 116.50 -2.09 -17.94 0.00%
XOVER 519.00 -9.34 -66.60
SOVX* 225.00 0.16 -130.17 Ex Greece