For a holiday-shortened week, the market proved to be fairly eventful. Stocks closed slightly higher with corporate credit spreads closing on a firmer note; the investment grade CDS (credit default swap) index is closing 4 basis points tighter on the week with the high yield index out-performing, closing 1 ½ points better on the week (equivalent to 60 bps tighter).

North Korea tested a nuclear warhead and General Motors’ impending bankruptcy continued to generate headlines; nobody, it seems, is happy about the GM situation except for the lawyers who will generate many hundreds of millions of dollars in litigation fees. The Case-Shiller home price numbers had the index dropping at the same rate year over year with no real sign of a bottom with GDP number showing the economy contracting at a rate of 5.7% as the U.S. dollar got pummeled by the Euro (closing at 1.41). Crude oil prices closed above $66 a barrel with Gold prices fast approaching $1,000 an ounce. Treasury bonds, particularly the 10 year maturity, dropped over a point lower on Wednesday in a massive move although they recovered somewhat by Friday’s close. Foreign lenders are essentially demanding higher yields from a U.S. government that they deem to be a spendthrift borrower. PIMCO’s prescient CEO Mohamed El-Erian expressed his worry that the Federal government may find it difficult to leave the business of business; once the camel sticks its nose underneath the tent or so goes the saying…

This week’s massive sell-off in 10 year treasury bonds was a serious event but the market seemed fairly stable by Thursday, brushing it off as a non-event. Auto-parts supplier Visteon Corp filed for Chapter 11 bankruptcy protection in a sign of the times for the U.S. automobile industry; there will be more bankruptcies to come. GM bondholders rejected an offer to swap the company’s debt for equity, hastening the onset of bankruptcy with the company announcing that it would be filing for bankruptcy protection on June 1st, ending any speculation, if there was any (nobody who knew anything about the company’s finances, including the government, doubted this outcome for a second), about whether the automobile giant would default or not. The auto-parts suppliers saw their CDS spreads close wider across the board with names like American Axle and Lear Corporation coming under the gun on the heels of the GM situation. In a landmark headline, $3 billion hedge fund Pequot Capital announced that it would be closing down after investigations continued into improper dealings dating all the way back to 2001; there must have been a little more something going on to nudge Pequot’s founder Art Samberg to get out while the going is relatively good. Despite some positive economic data (i.e. better-than-expected durable goods orders numbers) economic fundamentals lean on the negative side, with mortgage delinquencies continuing to increase. Players should beware and not get carried away by the rally; the next move wider in credit spreads will likely be rapid and unforgiving.

British telecom Virgin Media issued $650 million equivalent in high yield bonds with new issues still finding a home amongst real-money investors who have to put their money to work somehow. Europe saw some new bond issues with pharmaceutical Pfizer issuing 4, year, 7yr, 12yr, and 29yr Euro-denominated notes as telecom Deutsche Telecom issued €500 million 5 year notes. Broker Goldman re-opened its existing 10 year bond issue (7 ½% of 2019) by an additional $1 billion while troubled broadcaster Clear Channel was rumored to be in talks for a debt exchange. Troubled casino operator Harrah’s announced a $1 billion note exchange with its 5 year CDS closing several points tighter on the headline. Interestingly, there were several aggressive short-dated offers for Harrah’s CDS; just a couple of months ago, it was virtually impossible to find a decent offer in the troubled casino operator with 1 year CDS trading at 60 points upfront (we traded some this week at 9 points upfront). UK mortgage lender Bradford & Bingley’s announced its plan to skip payments on its subordinated bonds. Monoline insurer Syncora (formerly known as XL Capital Assurance) saw its 5 year defaulted CDS contracts settle at 15 cents on the dollar; this relatively low recovery rate points the way forward for the remaining monoline insurers should their CDS contracts also get triggered. The CMBX (commercial mortgage backed securities CDS index) came under pressure this week, closing several points lower. With the summer season officially here, liquidity and flows in the credit space will likely remain relatively light barring any exceptional headlines.

HV12: 315
IG12: 139
HY12 (trades on price, not spread): 81 ½ 

Abdullah Karatas
Vice President – Trading
Natixis