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Daily Market Commentary

Risk taking is back to the market, but bonds aren't 100% convinced.


The yield curve is slightly flatter this morning, long bonds are still trading slightly higher, while 5 years and shorter are a touch lower.


Considering the reversal in equities yesterday which continues in Europe, we would have though bonds would be trading lower once again this morning.  the mid-day reversal in Treasuries yesterday was no less dramatic than that in the Dow Jones average.  At one point, the 10 year was trading at 108.00 or 3.29%.  It then plunged during the after, hitting 3.62% late in the afternoon.



Sparking the turnaround is a plan being put in place to save the monoline insurers, and subsequently the portfolios of bonds they insure.  Strangely, regulators are pushing the big US financial institutions to step in to the rescue.  We find it interesting (and amusing) that the insurees are stepping in to save the insurers.  Weren't they paying for the exact opposite??



The BCE takeover has been in the news a lot (as mentioned above).  From a fixed income perspective, there could be positive implications of the deal falling apart, as Bell bonds would maintain their A credit rating and possibly bounce back to their pre-deal levels.  Teachers insists the deal is going through as planned, but the equity trading and the speculation in the press are saying otherwise.  Generally, we are inclined to believe the credit markets (for obvious reasons) but they have been very hard to read recently. 


Meanwhile, Bank of America has reported that there is a $230 billion backlog of High Yield debt waiting to be sold.  With credit spreads hitting levels not see since 2003, it has been very hard to sell that debt.  Enter Bell's plans to sell about $21 billion in additional high yield debt to finance the buyout.  Regardless of Teacher's commitment to the deal, the market will tell them if it's going to happen or not.  Certainly their margins will be squeezed from when they originally worked out the numbers on the deal.



The CAD$ is on fire this morning as risk taking trades return.  The CAD$ has been trading exactly in line with global willingness to take risk.  Recall that the loonie topped out in late October, exactly when the major equity indexes were hitting their tops.



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