Thursday, October 21, 2010

Wednesday Bonds

Credit did well today with both IG and HY turning in positive advance/decline ratios of approximately 1.1x.  New issue flow was muted and secondary activity kept pace with yesterday, but not much more.


BAC continued to be in the headlines today as folks pondered the whole FRBNY/PIMCO/BLK repurchase story.  Wells' earnings did nothing to help their beleaguered peer.  At first bonds started to claw tighter, but couldn't keep the momentum going and slipped deeper down the well.
Looking at the BAC 5.625% 7/20:

How do you think this will fare tomorrow when folks have read - and knee-jerked to -the WSJ story stating:

The federal regulator overseeing Fannie Mae and Freddie Mac hired a law firm specializing in litigation as the agency considers how to move forward with efforts to recoup billions of dollars on soured mortgage-backed securities purchased from banks and Wall Street firms. 
The Federal Housing Finance Agency, which in July issued 64 subpoenas to issuers of mortgage securities, bank servicing companies and other entities, is working with Quinn Emanuel Urquhart & Sullivan LLP, a Los Angeles-based firm that specializes in business litigation, to coordinate its investigations.

Since the financial crisis, 400-lawyer Quinn Emanuel has avoided building a banking clientele, making it a top suitor for plaintiffs pursuing banks. The firm has represented MBIA Insurance Corp. in several lawsuits against top U.S. mortgage banks alleging that the insurer was fraudulently induced to cover losses on mortgage-backed securities. Those cases are ongoing.
Yeah, gonna be fun for BAC holders again. On the fly, I would say BAC holders can feel fortunate they don't own H&R Block paper.  H&R Block CDS rose to 768 from 722 on Tuesday and continued to bleed out today. A credit strategist focusing on U.S. banks said the company could face the same issues as Bank of America because of a legacy portfolio of mortgages from Option One Mortgage Corp., which it agreed to sell in 2008.

The HRB 5.125% '14 opened weak at $92ish and rolled over during the day to land around $89. Oh, did I mention the downgrade?  Yeah, hope those tax receipts are huge - best of luck (honestly though, the company's on the hook for the mortgages even though they were sold, but they have decent enough cash flow to cover a good chunk - but if the repurchases are larger than expected - POW).  Might look at these as a value play soon - wait for them to shed more points.

Moving on....

With the dollar down, risk on trade happening today, govvies did pretty well, all things considered.  Tomorrow 2yr, 5yr and 7yr get announced for auction next week.

Curve steepened a bit in 2-10s and flattened some in 10-30, the net being marginal.

Tomorrow: we get jobless claims (455k expected, 462k prior) and Philly Fed (1.40 expected, -0.7 prior), claims last week were a disappointment - wouldn't be surprised to see modest bounce - and Philly Fed forecasters are looking for uptick, just might get it.

Does it feel like a bubble to you?  Me neither.

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A student of the markets that has held portfolio management, analysis and trading positions for over 15 years.