Another day mixed on risk today. Market feels uncertain and is searching for direction. So far a strong month, folks trying to digest the reason and create/modify expectations of Q4 performance.
Fixed Income:
Volumes were higher today as IG volume increased 15% and had an ADV/DEC ratio of 1.56x, which was lower than yesterdays 1.65x. HY volume was 46% higher and the ADV/DEC ratio was 1.18x versus yesterdays 1.30x. My read on this is that the market is taking a breath and some gains. Econ data in the US and a continuation of European (read Ireland) fears constrained the risk trade. Of note, RIG lost about 2 points in both the IG and convert space while the equity gained.
As well, corporate borrowers in the U.S. are squeezing investors as record-low interest rates and a lack of high-yielding alternatives force bondholders to accept the smallest concessions on new debt sales since March.
Yield on new bonds fell to within 15 basis points, or 0.15 percentage point, of existing securities on average last month, according to the most recent data from JPMorgan Chase & Co., the biggest underwriter of the debt. The so-called new-issue premium is approaching this year’s low reached in March, which was the least since the credit crisis began in mid-2007.
Concessions
The yield curve was marginally lower today with the long end outperforming as data continues to show weakness and there are buyers-a-plenty.
Munis:
Interesting news today:
Meredith Whitney, the superstar analyst who famously forecast disaster for America's big banks before the credit crisis struck, is now warning about another looming threat: The wreckage from over-stretched statebudgets.
Today, Whitney is releasing a 600-page report, colorfully entitled "The Tragedy of the Commons," that rates the financial condition of America's 15 largest states, measured by their GDP. Whitney claims that the study is the most comprehensive, in-depth analysis of the states' murky patterns of spending, revenues and benefits programs ever assembled by the government, foundations, or another research firm.
What Whitney found reminds her of the poor disclosure and arcane accounting rules that hid the fragile condition of the banks and monoline insurers that she unmasked. "The states represent the new systemic risk to financial markets," says Whitney. "I see a lack of transparency and an abundance of complacency on the part of investors and politicians, just as we saw before the banks imploded."
Put simply, the study warns that the giant gap between states' spending and their tax revenues, estimated at $192 billion or 27% of their total budgets for the 2010 fiscal year, presents two dangers that investors are seriously underestimating. First, municipalities could start defaulting on their bonds guaranteed by the cities and towns themselves, an exceedingly rare event over the past three, mostly prosperous, decades. "People keep saying it can't happen, just as they said national housing prices could never go down," says Whitney. "Now, it's a real danger."
On that note, the City Council of Harrisburg, Pennsylvania, capital of the sixth most-populous U.S. state, voted to hire lawyers to explore seeking bankruptcy protection.The City Council voted 5-2 to seek professional advice on bankruptcy or state oversight. Harrisburg, which needed state aid to avoid default on $3.3 million of bond payments this month, rejected hiring a financial adviser at Pennsylvania’s expense. The council opted instead to seek a new adviser and experts who can lay out the benefits and pitfalls of bankruptcy.
And finally, from the QSCB (affectionately Q SCAB) market (qualified school construction bonds):
The Pennsylvania State Public School Building Authority is selling $325.5 million of taxable qualified school construction bonds in the largest deal since the program began in February 2009. The securities, set for issue Sept. 30, will fund the renovation and building of schools in 46 Pennsylvania districts, improving energy consumption and laboratories. The bonds are ranked AA by Fitch Ratings and Aa2 by Moody’s Investors Service, both third-highest, according to preliminary offering documents. The school-bond subsidy is paid directly to the issuer, as is the case with Build America Bonds. The U.S. government subsidizes as much as 100 percent of the interest costs on the school debt and a fixed 35 percent on Build Americas.
But enough of fixed income already.
Equities:
Meager day in the equity markets today with the index gaining just shy of 50bps. To reiterate the obvious, energy and healthcare lead the charge, while telcom and materials treaded water. Is that a word, treaded?
I have been spending some time on looking at the growth/value and capitalization proposition, should have more on that tomorrow (cant wait, can ya?)
Growth, its all about growth right now.
Currencies:
Dollar weaker today - again. Unless something implodes in Europe (or rather, until), I cant see a reason to rally the buck.
That's all I have tonight. Later.
