Profit Taking

The combination of new issue supply, weaker equities and rich valuations led to some spread widening in the credit markets today. Treasuries performed on cue with the dip in stocks, rallying about 4 bps, helped by the Federal Reserve's buyback of $8 billion 3 year notes as part of the ongoing quantitative easing program. Goldman Sachs earnings hit the mark but that was a disappointment as the market had gotten used to the company exceeding estimates by a wide margin. Petrobras, the mammoth Brazilian energy company, wrapped up its benchmark size offering of 5, 10 and 30 year bonds. With a Baa1 rating on positive outlook and a solid business profile, 200 bps over Treasuries looked cheap for 10 year bonds. Overall, the deal reportedly garnered over $10 billion in orders and will price tomorrow. Investment grade sovereign and quasi sovereign Latin American bonds were generally a little weaker to price in the new supply. With further new issues expected over the next week, continued weakness should be expected but its not anything to worry about as the credit market is likely to trade in a range all year long. The former soviet republic Belarus priced a 7 year deal at about 9%, making slightly lower rated Argentina look a little rich at nearly 100 bps tighter in yield. That pattern is likely to emerge numerous times in the first quarter, as rich secondary market valuations get repriced with new issues. Especially vulnerable are Latin American debt issues as compared to new supply from Asia, Eastern Europe and the Middle East.