C.M.O. 12.29.2009
Credit Market Overview
December 29, 2009
For a good portion of the first part of this year, less bad was the new good. That Armageddon was not unfolding at an increasingly rapid rate was all investors needed to put in the March bottom and take things up fairly quickly from there.
Greece got its own taste of “less bad/new good” recently as Moody’s Investor Service down graded the nation’s debt by a single notch-to A2 from A1- vs. the double bang that S&P and Fitches hit it with. “This will give the government some time”, was the reaction of Nikos Maggianas, an economist with the National Bank of Greece. The stock market moved 4.5% higher the day after the announcement.
The “time” Mr. Maggianas speaks of could have come in the “nick” of it as just days before Ewald Nowotny said, “the ECB has no mandate or intention to take into account the situation of a specific country, especially not with regard to public finances”. EW is on the ECB’s governing council so chances are he has a good idea of the views of that august body.
Another of the PIIGS, Ireland, seems to have moved from the house of straw to the house of sticks as the Central Statistical Office said recently that GDP had risen 0.3% from the previous quarter giving the Emerald Isle a recessionary reprieve; at least on technical terms.
Ratings and the general economic climate are important when issuing bonds and as 2009 comes to close the other “I” in PIIGS (Italy) is scheduled to issue debt tomorrow. Facing “Holiday” volumes, it is not certain how the auction will go but with a budget deficit of around 5% or less than half of Greece’s 12% the market still seems amenable to buying paper from the largest issuer in the E.U.
Another indication of the relative value the market places on Italy’s debt comes not only from the price of its default protection but where it trades with respect to higher quality issuers. In the E.U. that benchmark is Germany. Italy’s 10-year bonds are now yielding 0.82% more than German Bunds while the premium on Greece’s sovereigns of similar maturity is around 2.73%
Italy might be the largest issuer in the E.U. but Uncle Sam holds the top spot on a global basis and is in the middle of a three day stretch of auctions totaling $118BN which will bring his total to $1.48TN for the year. With a tab like that one would think President Obama would be working towards creating a few more “Fat Cat Bankers” so that he doesn’t have to reach into his own pocket every time the bill comes.
The $44BN of two-year notes auctioned yesterday drew $128BN in bids or a “cover” of 2.91. This was not as good as the 3.07 number averaged over the past four auctions but given where we are on the calendar it was seen as a good number none the less. The $42BN in five-year notes scheduled for later today and the $32BN in seven-year notes are expected to go well as this is where the greatest foreign buying interest has been seen in the past. “The auctions have been dominated by foreign bidders, and there is no particular reason to suspect that foreign reserve managers will be any less interested because of year-end”, was how Credit Suisse interest rate analyst, Carl Lantz put it.
With the prospect of interest payments on the U.S.’s debt equaling its defense budget in years to come let’s hope Lantz has it locked in.
Default protection for Greece’s debt got very close to the levels seen earlier this year recently. The 289bps level on 12/21 was not that far away from the 292bps level seen all the way back on 1/20.
At 159bps last night Ireland is still in the band of price action bounded by the twin peaks of 168bps and 172bps on 8/19 and 9/4 respectively and a stretch of closes in the low 120bps range during October.
Italy’s CDS levels reached 118bps on 12/21 which is in line with levels seen back in April of this year and well off the low of 56bps touched on 8/4. Last night’s closing level was 108bps.
The shape of the protection curve for the U.S. looks similar to that of Italy only at lower levels with last night’s close of 38bps. It should also be noted that while reaching the 41bps level on 12/21 this was still below the 48bps high reached back on 5/29.
Enjoy the Holiday shortened week.
Jim Delaney
