Market Volatility Returns to Add Pressure to Weekly Spreads

The week wrapped up with more of the same trepidations in week’s prior as Euro fears continue to pressure credit and keep total returns sliding. Suki Mann a trader at Société Générale said that equity markets are tanking as risk aversion rises, while the ultimate safe haven, government bonds, saw YTD returns increase to 3.31% from 2.8% last week. Cash credit has given up some ground in the same period, falling from 3.9% to 3.76% currently after posting a high of 4.2% in early May. Jesse Litvak and MBS trader at Jeffries said that he anticipated no economic catalyst to take yields higher or lower until the market get the next Payroll/Unemployment rate information. Next week will bring more housing data (Existing & New Home Sales and S&P Case Shiller). Pricing he said was reminiscent of spreads in 2008 when the stock market had 100 and 200 pt swings often. “I would say what has taken place since May 9th thru today has been one of those dips,” said Litvak. “Call things off 3-5pts from May 9th, and I think you could argue that we should be down more given the carnage that has taken place in stocks. But that just speaks to the landscape we have in our space. There are still no forced sellers in this market, and in conjunction with that, I get the sense that there are a lot of different types of accounts (Hedge Funds, Private Equity, Money Managers etc) that are trying to buy on this dip.” The cheapest source of bonds actually is going to come from the street where buyers are able to get assets at prices 5pts lower than where they were a week or so ago. In the mortgage space loss adjusted/unlevered bonds are yielding 4-6% for clean prime assets/7-9% for dented prime/and 8-10% for alt-a and MTA paper. “Things feel sticky and you HAVE to respect the markets, but cooler heads should win out long term, and I think that mortgages still look like one of the cheaper parts of Fixed Income in general. At the end of the day, the short term is going to be all about Europe….and how that will have its way on equities. We should trade in tandem with that sentiment,” suggests Litvak. Sources say the passing of the >massive financial reform in the Senate is also likely to bring some additional volatility to trades as the market tries to figure out just how far Congress will go with the rules.