REVERSE INQUIRY – THE NEW MANTRA – CASH ON SIDELINES CANNOT WAIT

REVERSE INQUIRY – THE NEW MANTRA – CASH ON SIDELINES CANNOT WAIT http://www.bloomberg.com/news/articles/2015-06-25/america-s-new- bond-underwriters-have-arrived-in-search-of-alpha

Credit comment: Volatility in rates stepped up a few notches

Credit comment: Volatility in rates stepped up a few notches as a Greek deal tetered between German-mandated further austerity requirement and Greek demands for relief; we saw more mud-slinging from both sides with little clarity. After widening most of the time during the rate backup, credit decided to draw its line in the sand and make some wary gains (IG is probably 4-5 bps better). The story is still gory in credit overall; outflows in HY in recent weeks from flighty ETF money have severely dented the YTD inflow numbers. The M&A deals continue to gain favor; and look enticing, especially to the acquirers on the IG side as low rates continue to permit such combinations; Today, we saw ETP wooing Williams to prepare for a backlog in pipelines. With the new plateaus set by oil, Energy should continue to see this activity as players jockey to position themselves for the new normal (if they have access to the capital markets, that is.

Credit comment 

Everyone’s talking about liquidity and the ensuing crunch from its lack thereof, but that has not stopped the new issue engine to keep steaming along. Probably, CFOs and Treasurers fretting over rate increases and moving to lock-in the last of the low rates – presumably to pay equity holders with dividends and share repurchases. And probably explains why credit spreads are weaker even as rates have backed-up. New issues dominated trade volume last week (RAIs, CSCO, Embraer etc). 
High yield still tracking “B” in yield averages (6.2% ish) while CCCs gave up some ground but still are tracking below 10%. “B” are also the best-performing sector in credit +3.6% YTD whereas Investment-Grade is negative.

Credit comment

You could not have missed the 100yr PETBRA bond. It described the market beautifully: a 100-yr maturity but just a tad longer than the PETBRA 44s in duration, and less riskier  than the 44s because of its lower dollar price (came @$81) – a fact missed by most market pundits. The book ran up to $7bb as buy-side folks scrambled to get the yield. Gone from investor’s minds were worries about the health of PETBRA nor its numerous investigations pending from bribery and payoffs. 

On the sovereign side of such a coin, Greece continues to dance with creditors, getting around a June 5th IMF payment by utilizing a loophole to pay instead, at the end of the month – another push back on liabilities. In more staid news, employment numbers domestically strengthened convictions that Fed would raise in September.

Credit comment

The tug of war continues between the Grecian representatives and their lenders with confusing headlines overall. The concern extended to Greece missing its June IMF payment. 

This week may provide more clarity with Greece expected to stay in the Euro with lender concessions. The drama has weighed on our market with stronger Treasuries and weaker credit spreads. Month-end Index rebalancing did usher in some buyers and durations extended in the last week. 

Oil continues to be a slippery story in credit; to put it in context, oil is approximately half of where it was last year and yet yields are almost the same! (testifying once more to yield grab by hungry cash in ETFs and quantitatively driven funds that reach for low-hanging fruit even if they may be grenades in disguise). Have a good week ahead!

Credit comment

Investment Grade spreads have been holding steady at +135 bp or so while High Yield has compressed a bit, around the +450 bp mark. As the rate decision seems to get pushed back later, the treasury curve has steepened quite a bit (10-30s 80 bp now — tights were +55 bp). Also, the dollar has suffered vs the Euro (1.09 now vs 1.04 tights) and other currencies. The Ruble meanwhile has quietly tightened to 50.4 vs dollar, from the wides (70) as the Ukraine drama has become common news. 

Meanwhile, corporate M&A is alive and strong: Charter buys Time Warner for $55 bb and the result is expected to stay Investment Grade on first glance! Obviously, CHTR and TWC are expected to dominate secondary trading activity today.

(BV) Why the Fed Worries About Other Countries: Mohamed A. El-Erian