C.M.O. 7.27.2009
Credit Market Overview
July 27, 2009
It is ironic that one of the biggest factors in whether credit spreads widen or narrow on a daily basis is what happens in the market where spreads are always zero. That market is the one where the debt of the U.S. government trades and at each maturity point whose yield is considered the risk free rate.
A fall in yields that results from a rally in Treasuries will temporarily cause a widening in credit spreads as it will take a day or two for those markets that trade in relation to Govies to fully adjust to the new level. Likewise a selloff will squeeze spreads a bit as the benchmark yields rise and the agency and corporate markets work to adjust.
This coming week should prove to be a challenge for the Treasury market as Uncle Sam hawks $115BN in debt. An amount heretofore not seen sold in a single auction cycle. To give you a breakdown of what’s coming: Monday: $6BN of a re-opened 19.5 year 2.5% TIPS issue, $32BN in 13-week T-bills, $31BN in 26-week T-bills; Tuesday: $27BN 52-week T-bills, $42BN 2-year notes; Wednesday: $39BN 5-year notes; Thursday: $28BN seven year notes.
To alleviate some of the pressure the Fed has been buying Treasuries in the open market but with Ben Bernanke buying $3BN while Tim Geithner is selling $115BN it doesn’t take Larry Summers to figure out which is going to have the greater effect.
James Newman, head of .S. government and agency trading at Keefe, Bruyette and Woods in NY says, “The concern is that the steady demand we’ve seen for new Treasury supply can’t keep up with the increased auction sizes. If they don’t keep up with these monthly increases, you have the potential to see some sloppy auctions”.
What is bad for the Treasury market does have the possibility of being good for the stock market as sinking gov’t bond prices tend to drive investors into equities. Brian Edmonds, Cantor Fitzgerald’s head of interest rates, echoed this sentiment recently saying, “The Treasury market is broken, the story seems to be stocks. Stocks are up again and underperforming cash is being driven into equities and out of Treasuries”.
While the demand for Uncle Sam’s debt may be waning, not so it seems for debt of private sector issuers. The first six months of 2009 saw $1.79TN in global corporate-bond issuance of which 30% came with some sort of government guarantee according to a recent report by S&P. The previous record was $1.74TN in the January to June period of 2007. In the high-grade vs. high-yield race that which is not considered junk amounted to $1.72TN against $66.2BN for that which was.
The stock market has put in a solid two week stretch and while one might think a breather might normally be in order, some abnormal issuance in the Treasury market might provide some even more solid support.
Enjoy the week.
Jim Delaney
