The ten year treasury nudging 2% has caused a pause in credit, especially with the lower coupons. Not a fundamental event but sorta like waking up on the last two days of a great vacation and knowing it is almost over and time to pack the bags. The reason that it is not fundamental is because we have QE intact and this will continue to inflate the markets. But in the meantime, this pause in a tired market will cause ETF sellers to line up their withdrawals and cause short-term, deepening sales — all of which are good for opportunistic buyers who have bought into the QE-supported economic strength.
Monthly Archives: January 2013
Credit update January 28, 2013
It feels like a start to the “please your shareholder” year. The pendulum is definitely swinging to re-levering the balance sheets now that Uncle Sam seems to be panting from the effort of single-handedly levering up while consumers and companies were doing just the reverse. The new issue frenzy is still quite strong in both investment grade and high yield land. The amount of money that has come in to seek returns is substantial. We saw bank spreads do quite well last week; Sallie Mae’s new deal was well received by the market place. Utilities have been noticeably softer as shareholder –friendly actions come down the pipe; it is a well-known fact that this sector has enjoyed tremendous success from investors chasing defensive names with high dividend yields. Now that the Ute sector has run up so much from such favors, their management needs to apply new strategies to continue the love affair — what better way than to issue debt for buybacks or dividend increases?
Debt markets are trading $DELL as if it is going to do a 15-16 billion debt financing and then stop. The company needs yards more to strategically acquire, buy technologies and expand in the direction it wants to go. The $15 billion number is only a starting point. Do you want to lend to a firm that is going to be an issuing machine? What rates will you be willing to bear being a lender? DELL 19s are trading 5.75% area. My sense is there still risk here.
Dell’s announcement that it is going private brings up some interesting points to ponder:
1. What will the (new) private owners do with the company?
2. (a) Are they recognizing untold value to be seen in a breakup of parts or
(b) are they seeing value in new strategic directions? If the latter is true, is it so extreme a direction that it cannot be done while being public?
3. With rates so low, high yield financing so readily available and cash balance high on balance sheet, is this just another levered play to prey on a cash flow machine?
It appears that a rotation has started sector-wise from fixed income into equities. This has largely by-passed high yield for now, given the relatively high yield still sought by income seekers. The rotation is probably a normal course given the paucity of yields in the investment-grade and risk-free areas and interest rate risk creeping back into the radar of most participants. The US economy is picking up traction and a sense of optimism about future earnings, housing numbers and employment has taken center stage at least at the beginning of the year.
Notable numbers for credit:
Investment Grade .. +89 bps over swaps
High Yield … $104.5 on average
Emerging markets … +113 bps over swaps
The long Treasury pierced 3% and has hung around there for a few weeks. Previously, that mark would indicate a quick rush back into the Treasury but this time, it has wavered there with scant attention, adding to the risk-on moves by the market of late.