The economic news recently - GDP, car sales, ISM etc. - continues to redefine “less bad” and in some cases may have morphed into what might next be called “almost, maybe, possibly, slightly good”, although I hesitate to inject too much optimism into the interpretation.
CDS spreads and the stock market have responded with incremental moves tighter and higher, although they have recently slowed to a crawl, and spreads, as measured by the CDX indices, do appear to be correcting a bit with the high grade index posting back to back lows on 111bps on Friday and Monday and then widening to 113bps yesterday.
A measly 1.8% but enough to show up on a chart that has moved from 145bps on July 10th to Monday’s number in 17 trading days. Suffice it to say that there have been other minor reversals during that journey; a 2bp move on July 21-22 and another 2bps breather from 7/27 – 7/29. If there is anything different about yesterday’s 2bps it is that a) we don’t know that 2bps is all it will be and b) 2bps at the 125bp level is a smaller percentage move than it is at 111bps.
On the high yield side of things, the recent move down started on July 8th at 1019bps hit its nadir on Monday at735bps, a 284bps or 27% move down which included a 13bp correction on 7/15 – 16 equaling 1.4% and two other 1bp corrections, which given the index level should probably more correctly be considered sideways breathers than corrections. The move yesterday was a little more noticeable with the High Yield index moving up 19bps or 2.5%. Still not one for the record books, but the biggest counter trend move we’ve seen since the July 10th descent began.
As I have mentioned before, movement in the U.S. Treasury market can have an effect on spreads and big moves in government can distort the spread market for short periods of time. The quick one and two day corrections mentioned above fit nicely into that category.
The current 30-year bond has seen its yield move from 4.30% on 7/31/2009 to 4.49% last night and while 19bps might not seem like a lot when you start with 430 of them it must be realized that a) it’s only been three trading days and b) out in the “land of the big .01” each basis point on the 4 1/4s of ’39 represents $0.16 in price movement, so 19bps equals ~$3.00. In this case a move from $99.16 down to $96.08. Not an enjoyable experience if you’re holding.
The big number is obviously Friday this week with Nonfarm Payrolls and the Unemployment rate for July being announced. The impact of those announcements could be huge. Or, as in the case of the GDP last Friday, a yawn.
As with this correction in spreads, the current M.O. in stocks seems to be wait and see.