Abdullah Karatash
What is DVA?
The tone in the bond markets felt much better in the morning with investors buying bonds off a few cash bond OWIC (offers wanted in competition) lists.
Driving the demand for bonds is a combination of the lack of new supply of bonds (we are in the midst of earnings season) and overall much light dealer inventories.
That JP Morgan was able to tap the market with a $1.75 billion re-tap of an existing 10 year bond deal and Goldman Sachs was able to up its preferred 50-year bond deal size from $250 million (initial plan) to $500 million demonstrates the demand.
Issuer concessions for bonds have come in significantly from the wide levels of a few weeks ago as sentiment improves.
The JP Morgan bond re-tap deal launched at a spread of.225 basis points versus Treasury bonds; just a few weeks ago this would have had to come much wider to attract investor attention.
In the afternoon stocks dipped into the red as headlines coming out of Europe suggested that an agreement was not as close as had been suggested by an article in The Guardian.
In earnings, Morgan Stanley played the accounting game and beat estimates.
Given the recent market pressure on Morgan Stanley, that there was slightly more clarity around the bank's European exposure outweighed disappointing core performance (excluding DVA).
What is DVA?
A DVA is essentially when a bank is allowed to book a profit as the value of its bonds fall from par; this is a rule from the Financial Accounting Standards Board, Standard 159.
The market will continue to trade in line with headlines out of Europe but we may see the technical outlook for bonds improve a little as we head into year-end.
Initial jobless claims numbers are out tomorrow.
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