Friday, July 14, 2006

Mattress Fund Looking Pretty Good

Stocks are getting killed today, again. Hawkish Fed... very soft start to earnings season... weak retail sales report... not much for stock buyers to like. Corporate spreads are also weak today. Media has been getting the brunt of it so far this month among the large investment-grade sectors. Homebuilder DR Horton is getting whacked today, widening by 10-20bp, depending on where you are in the curve. I haven't seen trading in other home builders, but I will say that you have to have some kind of stones to own home builder bonds. Risk in the bond market is binomial -- either you make a relatively small amount of profit, or you suffer a very large loss in the event of a default. A company like Centex, which is rated Baa2/BBB, has 10-year debt trading around +180. You can buy AAA-rated General Electric bonds at +70, so you make about 1.1% to own Centex over GE. If the housing market gets really bad and Centex goes belly up, you lose 50-60%. Put another way, Centex only has to widen about 15bp to cause a 1.1% price decline, eliminating the yield advantage. I just don't like the risk/reward.

Treasury market is about flat. The 10-year is currently +2 ticks on the day, was down 2-3 ticks earlier in the day but as the stock market sell-off accelerated, it looks like a small flight-to-quality bid emerged. It feels like the 10-year has hit a pretty strong resistance point at 5.05%. I still bet we'll see 5.20% within the next 5 trading days.

In other news, this blog was mentioned in the Wall Street Journal's MarketBeat section (subscription required) for my post on the ZIRP. Maybe now more than 2 people will discover the blog.


Anonymous said...

Oh, come on, having a faithful loyal reader is so much better than the faithless masses who will celebrate you for a day, then discard you like used Enron Commercial Paper.

But, congratulations, anyway, I'll have to re-check my Friday WSJ, and frame it - maybe it'll be worth something one day in 20 years when the great Tom Graff, world's preeminant Bond Trader, bets against the Bank of England, and reaps millions from the wretched fools who dared challenge him.


Accrued Interest said...

Now we need more commenting. I'd appreciate 2-3 comments per post more than 100 extra page views.