Monday, May 11, 2009

Corporates: I'll never turn to the wide side!

Corporate spreads are weaker this morning, finally. I've been feeling like a pull back is long over-due in corps. Beyond the general feeling, two interesting notes on today's movement.

1) Recent new issue Dow Chemical is getting trounced. Dow's 10-year (8.55 5/15/19) was priced on 5/7 at a spread of 525bps over the 10-year. Now the bid is +600. Most recent new deals have moved quickly tighter, anywhere from 15-50bps almost immediately.

2) Other new issues producing mediocre results. Bank of New York, BB&T, Morgan Stanley, all basically at new issue levels. Again, most new issues have moved substantially tighter on the break. For what its worth, GE and Bank of America's deals are doing a little better, maybe 20ish tighter.

3) Today's InBev deal isn't going gang-busters either. Initially the price talk was "Low 300's" and "Mid 300's" for a 5-year and 10-year tranche. Recently when you've heard "Low 300's." that meant it would actually be +290. When you heard "Mid 300's" that would actually be +325.

The deal actually will come at +337.5 and +375 respectively. So they actually had to widen this thing to get it sold. I don't think its some kind of teetotaller conspiracy. I think the rally in corporate bonds is exhausted and its time to set up for a pull back.

Remember that when every one heads for the exits in corporate bonds, the Street won't be taking on massive inventory to take customers out of their positions. So the pull back could be more violent than the economic outlook would indicate.

Among other new issuers today was Microsoft, who sold bonds with a Micro spread of 105bps. Agencies were wider than that less than 6-months ago! Also Simon Property with their second offering this year, the other on 3/20. Worth noting that their March deal was sold at $97.5, now over $110. Coupon is going to be in the "high 7's" as opposed to the 11% yield on the previous issue.

For those who care, I've recently put on a decent short on the S&P (shorted SSO mostly) expecting a pull back there. It makes me a little nervous that this seems like such a popular view, though.

7 comments:

Josh Kalish said...

Just sell the futures, these ETFs aren't so good for overnight positions. You're not making the trade you think.

Jake said...
This comment has been removed by the author.
TexasRadio said...

Short SSO? May the decay be with you!

burak t said...

please excuse my ignorance but why not go long SDS? tracking? cost or what?
And I don't think accrued would hold that position overnight nor would buy something he doesn't know.

Accrued Interest said...

Josh:

You just have to rebalance if its a hedge. It isn't foolish to take it overnight.

Burak:

There is a natural decline to these things, even after forgetting the cost in the futures market. It has to do with the mathematics of multiplication and time linking. I'll post the math.

Josh Kalish said...

It's not that it's foolish. It's that it doesn't necessarily do what you think it will do. Every day they have to rebalance for most of these. You have gamma at the end of the day. Remember, anyone buying on T+x is getting the return from T+x-1. So as the market oscillates you will have behavior that doesn't parallel the market moves.

eg: If the market is up 20% over the last 10 days, but there was oscillation (which there always is) then your return could be -5% or +25%.

Futures will track properly. IMHO, these are only for a punt during the day.

GS751 said...

I know a lot of people that trade leveraged ETF's including adam warner over at adams options and I'd just assume short the /ES, but to each his own. I mean im the guy that buys TBT as opposed to shorting bond futures lol. so some people would say take a look in the mirror.