Credit update September 30, 2013

Amongst traders and watchdogs, a recently-neutered QE-taper talk deftly transitioned to budget showdown talks and the effect on rates and the dollar. The fact that the US will have less than $30 billion if budget ceiling are not raised, caused a wave of new, nay revised, uncertainty and an expected October drama in Washington. 1-year tenors on US CDS spiked to six fold levels last week, reflecting this uncertainty.

Meanwhile, a revitalized Europe seemed to be beckoning investors with fresh waves of good news, mainly stemming from Merkel’s successful election outcome and the ensuing calm that is expected to iron out many wrinkles across the continent from the recession. In other world news, Chinese industrial growth was also strong, delaying talk on the second-largest economy slowing down suddenly anytime soon.

Back on US shores, industrial optimism is running high; the ISM survey is on an upward trend and the expected reading this week is high, pointing to confidence in the sector. In credit news, J.C. Penney did an equity deal to bolster its flagging cash and its fortunes, and the stock traded weaker, along with CDS (traded as wide as +1218 bps on Thursday, according to Reuters – 350 bps or so wider from April this year). Blackberry was another name in the news, as the impending buyout transaction will mean new deals (equity and debt) to finance the purchase and for operating cash.

Have a great week ahead!

Spreads: Investment grade +81 bps over swaps (+2 wider week/week)
High yield – 6% yield to worst (+10 bps wider week over week)

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