PrefBlog

The Fed is pushing hard for a CDS Clearinghouse:

The Federal Reserve has given U.S. futures exchanges until Oct. 31 to present written plans on how they’ll make the $55 trillion credit swaps market less risky, according to four people familiar with the discussions.
…
Federal Reserve officials are not aiming to pick a winner to operate a clearinghouse, the people said. Rather, the central bank is hoping to set up a framework for the eventual winner.
…
The four groups vying to operate clearing operations include partnerships of Chicago-based CME Group and Citadel Investment Group LLC, and Intercontinental Exchange, dealer-owned Clearing Corp. and credit-swap index owner Markit Group Ltd. Eurex AG and NYSE Euronext also have submitted proposals.

The last major review of the clearinghouse on PrefBlog was my reaction to Accrued Interest‘s plan. On September 22 I deprecated his idea of trading only CDSs with a recovery lock.

On VoxEU, John Kiff, Paul Mills and Carolyne Spackman project a resurgence of covered bonds. While the essay suffers from the mind-set that the credit crunch happened because credit rating agencies are dumb and more rules will make them smart, the provide some interesting charts:

In a welcome piece of news, Bloomberg reports:

Sales of longer-term commercial paper soared 10-fold after the Federal Reserve began buying the corporate IOUs, a sign that the central bank’s efforts to unlock the market may be working.

Companies yesterday sold more than 1,500 issues totaling a record $67.1 billion of the debt due in more than 80 days, compared with a daily average of 340 issues valued at $6.7 billion last week, according to data published by the Fed. Most of the difference was probably absorbed by the Fed, said Adolfo Laurenti, a senior economist at Mesirow Financial Inc.

The source data from the Fed shows that the increase in issuance was almost entirely at the long-end, probably 90-day paper.

Accrued Interest looks at agency paper and likes it, despite the fact that position limits for Taiwanese insurers are being reduced:

The danger is that Asia doesn’t seem to agree. Selling of both Agency debt and MBS securities have been concentrated in Asia the last several days. We know that that Taiwanese insurance regulators are limiting allowable exposure to U.S. agency mortgage-backed securities, claiming the credit rating cannot be believed. If China or Japan were to come to the same conclusion, there would be real problems real fast.

The good news is that despite heavy selling from Asia, agency spreads (and MBS spreads for that matter) have moved wider slowly. Agency spreads are about 60bps wider this month, whereas corporate spreads have moved 117bps wider.

The Taiwanese rule change is:

Where previously there was no limit to investments in MBS issued by US federal housing loan agencies, namely Fannie Mae, Freddie Mac and Ginnie Mae, insurers will now be given a maximum ceiling of 50% of their offshore investment limit to such products by the three institutions. Maximum exposure to MBS and collateralised issues by any of the individual agencies will be set at 25%.

Now, this is the danger. On the weekend, I discussed the Fed’s balance sheet in terms of the Fed intermediating between the banks and credit risk, in the same manner as banks intermediate between Granny Oakum and credit risk. This is a natural thing and this is a good thing, but the Fed’s ability to do so is constrained by the ability to sell Treasury debt. Eight years of fiscal profligacy have eroded the available excess capacity … I don’t think we’re in trouble yet, but this is the type of thing that signifies trouble.

Just because equities were up so much today doesn’t mean we can relax! There are rumours that Barclays has foreclosed a hedge fund:

Barclays Plc, the U.K.’s second- largest bank, is seeking bids for $1.5 billion of bonds and $3.5 billion of credit-default swap contracts held by a hedge fund, according to people with knowledge of the auction.

The bank is selling bonds from European, Asian and U.S. issuers, according to the people, who asked not to be identified because the sales aren’t being made public. Barclays is also selling $970 million of assets, primarily high-yield, high-risk loans, the people said. Bids on both portfolios are due today.

Somewhat to my chagrin, I see that FixedReset issues are trading as if they were actually 5-year paper, rather than as perpetual paper with a five year call. The recently announced new issues offer a 5.60% coupon, with a continued reset to 5.60 if 5-year Canadas remain unchanged; rather than falling a lot, to offer equivalent perpetual yields, extant Fixed-Resets have fallen a little, to offer equivalent five-year yields with the assumption of a call at par.

In fact, yields to first call of the extant fixed resets are in excess of 5.60%, implying that the new issues will trade at an immediate (small) discount, rather than at the premium they would command otherwise. It’s a funny old world.

Another day of heavy volume, with a number of dealers crossing significant blocks.

There were forty-four other index-included $25-pv-equivalent issues trading over 10,000 shares today.

This entry was posted on Tuesday, October 28th, 2008 at 10:45 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.