Monday, May 18, 2009

Loans Versus Bonds Relative Value: Week Of May 14

The squeeze in credit continues, however now with a twist. While tightening was a dominant theme as it has been in the past 10 weeks, average loans tightened by 31 bps (from a much tighter average absolute spread), more than than double the absolute spread tightening in bonds, which tightened by "only" 16 bps. Also, as expected, the tightening in the recent heatseeked names ended, and Huntsman and Neiman Marcus bonds both blew out wider, reversing the trend from recent weeks, which was most acute in last week's data set. Curiously, the squeeze in TRW seems to be trying to compete with that in the Citi arb, as the bonds have tightened by approximately 1,600 bps from the beginning of April. The bankruptcies of GM and Chrysler it appears have no impact on this auto supplier at all.

At this rate, the credit market will soon be back to February levels where one could establish negative basis trades between loans and bonds (absent as the market has normalized over the past 2 months).

Data source: Loan Pricing Corporation Sphere: Related Content
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