Daily Market Commentary
February 7, 2008
Canadian bonds have rallied back to their mid-January highs, the Ten year Canadas yielding a paltry 3.67%, while treasuries are @ 3.56%
This comes as widespread concern is returning to the credit markets, much like we saw in August. While we haven't had the complete freeze that we saw in August, the level of concern has risen steadily since then.
As Scott mentioned above (and yesterday) in the Launchpad, the number of financial industry financings is almost alarming. Lehman and Wachovia both issued large preferreds this week (with 8% coupons), and MBIA increased their share float by 40% yesterday, plus another $300 million in preferreds.
We can't stress this enough - It is extremely concerning that risk free rates keep declining while the rates on new financings (the corporate cost of capital) continues to rise.
Banks are doing what they can to increase their profit margins, and some of that involves not passing along the savings the Central Banks are giving them in the form of lower rates. Witness the Big 6 banks hints of not lowering prime when the BoC overnight came down (they tested the public reaction and got a resounding NO). Also see tightening lending standards and mortgage rates which are not dropping as fast as Treasury bonds. This story is a clear example of the behaviour of banks (link available on request):
Another trend we are seeing is the widening of bid-ask spreads on otherwise liquid corporate bonds. This trend follows from the bond desks having taken some large losses on toxic debt (both CDO and traditional debt), and not having the protection they thought they had in the form of bond insurance and Credit Default Swaps.
There are some values to be had here, however. In the corporate space, we would focus on companies that are unlikely to need major new financings in the near future. Unfortunately, the vast majority of the Canadian corporate bond market is financial companies in some form or other. Molson bonds, for example, despite being BBB rated are trading at the same level as Bank of Montreal with a A+
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