Saturday, August 14, 2010

Credit Markets- A drop i-n 10-yr yields could trigger a large mortgage refinance boom

US Equity Strategy - corporate credit, both investment grade and high-yield, hit fresh highs, MBS rallied, while equities sank 3.7%. For the first time in history, the yield on HY bonds could dip below the sp500 earnings yield. The extreme low costs of debt funding hasn't been lost on companies - Recently, equity is now only 15%-20% of all capital issuance, the lowest levels ever. The drop in 10-yr yields could trigger a large mortgage refinance boom. Our MBS team believes the 30-yr fixed rate mortgage will dip below 4.5% (lowest since the ’60s) with about $934b of recent-vintage mortgages (after 2008) qualified to refi. we see the growing relative value chasm between corporate credit and equities as resolving favorably for equities. We identified 24 companies with high FCF yields and low P/E, using the following criteria: (i) FCF yield >8%; (ii) P/E $3b. The avg FCF yield is 12% and P/E 9.6X. The tickers are: TRW, AET, M, CEPH, FCX, UNH, APOL, ENR, ASH, RTN, ALV, NWL, CI, DISH, CA, NSM, AMGN, LMT, DV, MRVL, HPQ, DAL, MYL, and RIMM.
  • High-yield companies rushing to sell debt to reduce refinancing risk – high-yield companies have sold ~$27.9B in high-yield debt in Aug, w/25% of the proceeds slated to refinance bank debt – Bloomberg
  • JNJ debt sale on Thurs done at record low rates – JNJ sold $1.1B worth of 10 and 30 year paper on Thurs at the lowest rates on record –
  • European sovereign risks – Ireland – Irish banks rattle investor nerves – WSJ article – CDS costs on the country’s debt have risen to the highest levels since early June; earlier this week, the Irish gov’t received EC approval to inject an additional EU10B into Anglo Irish Bank –
  • European sovereign risks – Ireland – ECB has been in the market buying Irish gov’t debt in order to calm markets – the WSJ says the ECB had to buy Ireland gov’t bonds in the last couple days to prevent the market from deteriorating further. WSJ
  • ECB + European debt – the ECB will release the size of its bond purchases this Monday; amid all the talk of it being in the market buying Ireland gov’t debt, the amount of aggregate purchases may show an increase over the prior week – WSJ
  • Credit Suisse, Barclays may be start of bank hiring freeze – Barclays, Credit Suisse, and RBS may lead a slowdown in hiring as trading begins to fizzle. Analysts say that now that trading revenues are dropping they wouldn’t be surprised to see people shedding traders
    again. Bloomberg

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