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Credit Markets Weak with Outflows Increasing

|Includes:HYG, SPDR Barclays Capital High Yield Bond ETF (JNK), SJB, SPY

This morning credit is open weaker across the board.  

IG16 which had eked out a 1 bp tightening on Friday is right back out 1 bp and trading at 100.50.  It is basically the same story across the CDX indices where they are retracing Friday's gains.


SOVX is actually outperforming.  It is only out 8 bps today, to 229, which is only half of the 16 bps it tightened on Friday.  This relative outperformance could be healthy if it signified an improvement in sovereign debt, but it seems that it is an indication that some fear is slipping into the real economy and there is pressure on corporate credit.  With big sell offs over the past month in sovereigns and CMBS it is not surprising that corporate spreads are widening.

(NYSEARCA:HYG) and (NYSEARCA:JNK) both saw shares outstanding decline of Friday in spite of the bounce in price.  The daily decline in shares for (HYG) was the most since the decline started in early June.  If withdrawals are accelerating, it will have an outsized impact on this market that is already shaky.

Asides from the obvious declines in HYG and JNK and widening in the CDX indices, the HYG NAV is another sign of how shaky the market is.  The NAV did not drop as much as HYG on Thursday, but also showed a small decline in value of Friday.  This is a sign, to me, that liquidity is drying up in the HY market.  Bonds where the average bid/offer typically ranges from 1/2 pt to 1 pt, it widened to 1 to 2 pts.  This means that calculating the NAV is as much art as science when bid/offer is so wide.  According to TRACE volumes on the HY market plunged to the second lowest full day volume on the year.  Another worrisome sign and an indication that price discovery is low.

The single name CDS market rolls today.  So far it looks like it is creating a bit more activity, and might encourage some new shorts as they don't have to worry about another roll for 3 months.

I remain short (NYSEARCA:SPY), though down to about 1/2 position as I want to see how the market trades near the 200 day moving average.  I had cut my (HYG) short last week - long (NYSEARCA:SJB), but may open that again depending on how the market trades.  I thought we could get a bounce more significant than we got on Friday, but the combination of withdrawals, volumes, NAV calculations, CDS roll, and sovereign debt contagion in the forefront after this week's failure to come up with a Greek plan, I am more likely to go short HYG again.

Stocks: JNK, HYG, SJB, SPY