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Daily Market Commentary

This week we have seen a moderate improvement in credit spreads.  Particularly those high quality issues like agencies and provincials are coming in from what we consider to be insane yield premiums over Canadas.  We would still encourage anyone in the bond world to look at high quality credit like these, or even the higher rated corporates.  While we're not convinced the storm is over, there are some compelling values here.

 

 

Luckily, Michael Callen, the Chief cheerleader  CEO of Ambac Financial, has told us that there is no threat of insolvency at his company, and they are committed to maintaining their AAA credit rating.  Recall that Ambac issued about $5 billion in equity on March 6th (49 days ago, if anyone's counting) at $6.75 per share.  ABK is now trading at $3.65.  Doesn't exactly sound like a AAA investment, now does it?  There are still wide implications should Ambac and/or one of its competitors default on the insurance it has sold on a variety of bonds and CDOs.

 

 

  Earnings continue to be a tale of two economies.  Those that rely on the American consumer (and their homes) and those that don't.  Earnings are coming in strong for the latter, but outlook for the former is not so good.  Even the almighty Apple derives most of its growth from the spend-happy Yankee, and they've just released guidance that is disappointing the street.

 

Ford is one of the surprises today as they've posted a profit for Q1, and an increase in revenues.  Ford's US$ long bond has improved a lot in the last month, bottoming out at $63.00 (12.15% yield) all the way to 73.50 (10.5%) where they stand today.  Ford paper is now trading at much lower yields than GM.

 

 

The volatile US Durable goods disappointed, mostly on transports.  Ex Trans - they rose 1.5%, and last month's decline was revised upwards.  Initial jobless claims came out lower than expected as well.  One week does not a trend make, but neither of these numbers are bond friendly.  With the US 2 year now trading at the Fed Funds rate, the market is looking to when the Fed is done cutting rates, and that time is sooner than what was thought even a week ago.

 

 

Should the market be right about the Fed stopping sooner rather than later, watch for the C$ to decline against the greenback and the yield curve to flatten.

 

 



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