Credit markets appeared on hold last week, awaiting the terms and conditions of a Greek bailout (which was finally hammered out early this week). Accordingly, bonds ended the week roughly flat and didn't move much throughout the week.
The Morningstar Corporate Bond Index remained at around 200 basis points over Treasuries. The credit market is clearly more cautious than the equity market, as bailout chatter whipsawed stocks during the week, despite generally positive economic indicators coming from the US. On news Friday that a Greek bailout appeared more likely, the global markets rallied, after being flat to down earlier in the week, when reports were saying there was a snag in negotiations.
Equity markets favored global news over U.S. headlines, which included data that, for the most part, met or exceeded expectations. If there was a miss, it could easily be explained away.
By the end of the week, positive news hit the tape indicating that Germany was no longer going to require just a partial bailout aimed at encouraging Greeks to implement necessary wage, government spending, and pension cuts. In addition, the European Central Bank will not be forced to take a loss on its EUR 50 billion in Greek debt--earlier a key hindrance to an agreement. The ECB will get an exception to the newly proposed clause that will force all bondholders to exchange their Greek debt once there is a majority agreeing to the swap.
Even with Germany loosening its requirements and the ECB-friendly clause--which we view as steps in the right direction--the credit markets didn't move. This lack of movement didn't surprise us, as we contend that for spreads to tighten, the market must have definitive documentation on the next installment of Greece's bailout and a debt exchange agreement from Greek bondholders. We argue that while it was necessary to the credibility of the ECB that it not take a loss on its Greek bonds, such an exception is not likely to make the other Greek bondholders happy about signing an exchange deal.
In American economic news, US retail sales, excluding weak auto sales, matched consensus at 0.7%. US auto sales were soft as dealers cleared inventory at lower prices, but a spending pullback in big-ticket items such as cars indicates to us that consumers have a dash of caution in their optimistic outlook of the economic road ahead. Flat US industrial production missed consensus by 70 basis points, but softness in mining and utilities was to blame. Warmer weather was the primary factor pushing down the utilities component, which wasn't a surprise. American home construction increased 10% year-over-year with housing starts at 699,000, beating consensus by 24,000. Initial jobless claims in the States were at the lowest level since early 2008 at 348,000 (versus consensus of 365,000). The rise in the US Consumer Price Index met expectations at 0.2%.
