Morning Report: Corporate Credit Spreads are widening 4/9/18

Vital Statistics:

Last Change
S&P futures 2621 15.3
Eurostoxx index 375.48 0.66
Oil (WTI) 62.54 0.48
10 Year Government Bond Yield 2.79%
30 Year fixed rate mortgage 4.43%

Stocks are up to start the week after a pretty lousy session on Friday. Bonds and MBS are flat.

The week after the jobs report is usually pretty data-light, however we will get the Producer Price Index and the Consumer Price Index on Tuesday and Wednesday.

Friday’s jobs report should allay investor fears that the Fed is behind the curve, at least according to PIMCO’s Mohammed El-Arian. The light payroll number was probably weather-driven and the 3 month average is around 200k, which is solid and respectable. Wage growth came in as expected. Investors should take comfort that the Fed is probably not at risk of making a policy mistake due to an overheating economy. His view is that there is a 65 / 35 percent chance the Fed will stick the landing, meaning that economic growth will continue to more broadly expand and that markets will adapt to the higher volatility associated with normal monetary policy.

An example of higher volatility: corporate bond spreads. The end of 2017 was characterized by extremely low volatility in the stock and bond markets. When volatility falls, risk premiums contract. We saw corporate credit spreads reach pre-crisis levels. Since the beginning of the year, they are back to widening. Bad news for corporate bond funds, which have been beset by widening spreads and higher rates.

The story of the past couple of years has been “subprime auto.” The chickens are coming home to roost on this trade, and we are starting to see some subprime auto finance companies go bankrupt. Indeed, when you talk about the effects of low volatility in the market, things like this come to mind. With rates being held down by Fed actions, investors inevitably reach for yield. For a while, you could get a lower rate on a 6 year auto loan than you could on a 30 year fixed rate mortgage. This is insane when you take into account that the value of the collateral underlying a mortgage is 90% sure to increase over time, while the value of the collateral underlying the car loan is 100% sure to depreciate over time. That said, this won’t be a repeat of 2008 economically.

Mortgage credit got tighter in March, according to the MBA’s Mortgage Credit Availability Index. It was most pronounced in government lending, which could have been explained by some of the weakness and illiquidity we were seeing in the higher coupon Ginnie securities. Ginnie investors have been burned by higher prepay speeds and have been reluctant to buy the higher coupon securities. This makes the higher note rates (which is where the lower credit scores usually reside) cut off from the rest of the market.

11 Responses

  1. …while the value of the collateral underlying the car loan is 100% sure to depreciate over time.

    I thought that low interest car loans, even for prime lenders, for more than 50% of price, were based on the borrower’s strength, and independent of the declining value of the car. The stronger borrower can carry a few bad months and is less likely to lose a job in the first place. Chances of a prime borrower defaulting are slim in a middling economy and near none in a good one.

    But the subprime borrower has to be an awful risk 24 months out on a 90% LTV with 60-72 months to pay.

    Except for the years in the 80s when my law firm leased cars for all the lawyers and one-two staffers I have never had a car payment. My second former wife bought a brand new car right before the divorce and then tried to stick me with the payment but although I took all her credit card debt (community property left me liable no matter what so I took it and spent three years paying off her $30K in clothing [or something]) I escaped the car payment because she did not want my divorce “beater”. I sold the Porsche when she bought the shiny new car and bought a six year old ’84 grey VW Quantum wagon for $4K cash in anticipation of the attempt to stick me with the payments on her new car. Kept that thing four years until I was totally clear of divorce and S&L crash/real estate implosion related debt and then bought a brand new red pick-me-up 4 wheel drive truck for cash. Which my son wrecked. Ah, well, still didn’t ever have car payments.

    Liked by 1 person

  2. Peak Vox


    • the post this weekend ran a feature on how to address income inequality. they were honest enough to run a suggestion that noted it’s not a problem that needs to be solved.

      Mr. Grocer: Why don’t you just join the union, we’ll go upstairs together and cap daddy!
      Marty: This union, there’s gonna be meetings?
      Mr. Grocer: Of course!
      Marty: No meetings.
      [They continue shooting]


    • Peak vox indeed. “The most creative thinking in labor in years”. I’m pretty sure the Italian fascists and the Nazis in the 1920s and 30s have them beat by like 90 years.


    • I’m sure some candidates in some districts will use the threat of a Trump impeachment as a reason to vote for them . . . though that candidate probably has nothing to worry about in the first place.

      They are obsessed. What is a blue wave going to accomplish for them with Trump with the veto pen? Maybe they hope to move Trump but I dunno. They haven’t been very nice to him.


  3. A Reason thread about the Simpsons might be the most NoVa thing ever


    • Liked by 1 person

    • This whole thing gets on my nerves. Same thing with the Rosanne Black-ish/Fresh off the Boat joke. It was a tight joke, and that’s what it was–taking a real situation and making a funny.

      The extrapolation into all this Meaning with a capital ‘M’ is just idiotic. It’s getting to the point where you can’t just joke about minority cliches, but you also can’t joke about racists, or racism, or cultural things that involve anybody non-white, and so on. When it’s just a tight joke that should be enjoyed as a joke and then you move on, and when you want to do something about representation in cartoons or Hollywood YOU DO SOMETHING ELSE instead of obsessing over it on Twitter and elsewhere, because it was a joke. On a TV show. And was funny.

      The Roseanne Thing:

      Written by someone who I think is caucasian-identifying-as-Asian but I won’t get into that.

      Interesting that she omits the tone-deaf racist dig Roseanne supposedly perpetrated (so I pulled from Variety):

      In the episode, Roseanne Barr and John Goodman’s characters fall asleep on the couch, with Roseanne saying “we slept from ‘Wheel’ [of Fortune] to [Jimmy] ‘Kimmel.’” Goodman’s Dan responded that they “missed all the shows about black and Asian families,” to which Roseanne retorted “they’re just like us. There, now you’re all caught up.”

      These people are out of their f**king minds. It’s now racist to say we missed the show about black and Asian families, but it’s okay because they’re just like us. It’s almost like they are suggesting that white people suggesting they are equal with black or Asian families is now a racist thing to say. Or that’s exactly what they are saying.

      If you want to read Variety on it:

      This “hidden agenda” and “what they are really trying to do” and belief that everything somebody says is a f**king dogwhistle has to f**king stop. Christ on a cracker, this is the kind of mass hysteria among progressives that gave us Eugenics, the Nazis, and Woodrow Wilson.


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