Credit update July 15, 2013

Where do we go from here? The Fed is determined to grow the economy and housing with any combination of QE and its various tapers and capers. Rising mortgage rates have all but closed the refi pipes and the golden risk-free era of servicers clipping the coupon of the best (credit quality) mortgages is over. Will rising rates start to open the new mortgage lines and thus reduce the credit qualities that mortgage issuers have been leaning towards? Possibly, but rates have risen too fast in mortgages without a smooth transition of the baton from refinancing to first-time mortgages. Thus, it seems that QE taper might be slower and weaker to ease that transition.

 

Meanwhile, in corporate land, the possible end of low rates is a good thing since most new issuance had been equity friendly and nary for CAPEX, the tail that eventually wags the dog (GDP). This could mean the end of leveraging to spruce up EPS and a harder look at how firms can grow from here in terms of revenue and total enterprise profits. And as Barron’s pointed out, low rates has also cooled the ardor of private equity M&A-ers who look at more expensive financing packages for their eventual capital saviors and thus see a rockier road from here.

 

In the week past, great earnings from banks and release of reserves saw most bank/finance spreads tighten in the double digits. Better quality assets released reserves to dress up bank earnings. In industrials, Time Warner (TWC) was active with Charter Comm talk of interest in consolidating the enterprises. Sprint also made up lost ground with the surge in high yield and associated news in the name. Radio Shack also was active as the retailer was reported to try and improve its financial structure.

 

 

Spreads:

Investment grade +78 bps over swaps

High yield –  $101.5 price, 6.375% yield to worst.

 

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