A few negative developments in the credit space hurt spreads for the first time since last November when the problems with debt laden Dubai World were first made public. Cost of default insurance on a broad index of corporate debt rose 14% this week to a one-month high.
Greece announced plans to issue 3-5 billion Euros of five-year debt next week. Greece hasn’t issued any debt in the open market since spreads widened recently as investors grew weary about Greece’s heavy deficits. Ten-year Greek bonds currently trade about 320 basis points over German Bunds. US Treasury supply announcements move markets plenty, but the credit markets will be watching the results of this auction closely as sovereign debt problems become an even greater concern.
Banks have had a tough week, thanks to a proposal from President Obama aimed at limiting the risk of “to big to fail” financial institutions. Financials, by far the largest industry sector in the corporate bond market, will naturally feel the brunt of the damage if anything resembling what the President is proposing is enacted. The proposal focuses heavily on proprietary trading by FDIC insured institutions. Banks with large “prop trading” operations, (Goldman Sachs, Morgan Stanley, and other large banks), are leading the move downward.
Fannie and Freddie
We haven’t heard much on this front since the limit on aid that the Treasury could give the agencies was secretly raised from $300 billion dollars to infinity billion dollars on Christmas Eve. A recommendation was announced today by Barney Frank to “abolish” both of the agencies and replace them with something new. No comments were made detailing the reform, but as we have said a lot, the system is quickly moving toward being entirely FHA. This will likely turn out to be just another step in the same direction.
Have a good weekend.
Cliff J. Reynolds Jr., Investment Analyst
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