To coin a phrase, yesterday was the best of times in the corporate bond market. However, today is shaping up as the worst of times. The euphoria which reigned yesterday proved ephemeral. Spreads have widened significantly and the tone of the market is soft.
The IG 10 is 145/146 after opening this morning around 138. Spreads on financial concerns have leaked wider by 5 basis points but that understates the case as very little trades.
Lehman Brothers is the next financial calamity (sadly) on the horizon. There seems to be a very different feel about the price action today. The assembled throng seems poised to pounce on enfeebled Lehman and drive it into the ground. The stock price has collapsed about 40 percent and prospective suitors have fled as if the bride carried some social disease.
I quoted the CDS in a posting at 1132AM and they were 100 wider on the day at 420/440. There has been only a worsening of the situation and the CDS is now 440/460.
The next dropping shoe to listen for is the news that counterparty XYZ has decided not to do repo with Lehman. My guess is that the grand poobahs at the Fed and the treasury are burning up the wires (or a satellite) and are engaged in heavy arm twisting to guarantee funding from the Street.
The major problem for Lehman and the Federal Reserve/Treasury is that there is no suitable marriage partner. JPMorgan (NYSE:JPM) and B of A (NYSE:BAC) have done their part. Wachovia (NASDAQ:WB) and Citibank (NYSE:C) have even larger problems of their own. Merrill (MER) is also a basket case and I do not think that Morgan (NYSE:MS) or Goldman (NYSE:GS) would have interest.
Tune in tomorrow and see the show.
MBS: Not Pretty Today
Plain vanilla pass-through mortgage backed paper has taken a severe clubbing today. The paper has widened by about 16/32 to swaps. One dealer notes real money clients taking profits and hot money sellers, too. The same dealer also reported that international demand for US assets at these yield levels is light. In addition, the dealer reported that the comfortability level of international clients with GSE credit has only been marginally enhanced by the over the weekend financial intubation of FNMA and Freddie Mac by the Treasury. I am only hearing that in one spot, so as the sample size is a less than optimal one; I will withhold judgment until I receive more feedback from others.