Here Is Who The Next Bottleneck In The Euro Bailout Will Be...

From Peter Tchir of TF Market Advisors

The Markets Are Off To A Good Start Today For A Change...

S&P futures have already bounced 2% from their overnight lows (1148 -> 1172).  Europe didn't even have the decency to wait until the US woke up to rally.  The markets are better, but still broken.

Across the board credit is doing better.  Main is back to 183 and 7 tighter on the day.  XOVER is back to 750, 20 tighter on the day and almost 70 tighter from YESTERDAY's wide levels of 818.  

Even bonds are doing slightly better, but are not showing the same signs of a squeeze that we are seeing in the credit indices.  Italian 10 year yields are 7 better on the day, back to 5.62%, but that is still almost 40 bps higher than it was a week ago. 

The outperformance of the the CDX indices, or hedge products, indicates that this is a short squeeze and a rush to put risk back on.  The "basis" for the indices is also showing an extreme level of bullishness in the indices relative to the underlying markets.  IG16 is trading at least 5 rich to fair value, and Main may be trading more than 10 bps rich.  So indices are outperforming single name CDS which is outperforming bonds. 

I would be careful going long credit for a trade through the indices.  That amount of out-performance is almost impossible to sustain and I would expect single names to snap tighter or indices to gap wider fairly soon.  I would avoid playing the long end by buying bonds, although they are the cheapest, and theoretically have the biggest upside potential, they have too wide of a bid/offer and if the crisis isn't resolved (and it isn't yet) it will be hard to get out of bond positions.  There is almost pent up demand from issuers, so sourcing bonds through the new issue process is a better bet.  At least you know the bonds will come with a big concession and the underwriters will be short bonds and have a bid for them, for at least a few days.

HY has done very well. It has started to outperform. HY16 is up to 93 from 90 the other day.  The risk/reward is still okay in this, but unlike earlier this week where I was positive on HY vs other assets, I'm now neutral. I would be selling out of HYG and JNK as they never really caught up to CDS and have already priced in more strength to the underlying bond market than there really is.

Europe must be hoping that the Dutch aren't sensitive people.  We are all waiting for the outcome of a conference call between Germany, France and Greece.  Holland isn't on the call, yet they are the 3rd largest AAA country in Europe and are responsible for 10% of EFSF's AAA rating.  Germany has taken the time to mention Finland's demand for collateral.  Finland is only 3% of the AAA portion of EFSF, but everyone is paying attention to them, yet Holland seems to be taken for granted.  Holland has their own problem bank, ING, and came out yesterday with a statement that the Dutch government considers a Greek default as unavoidable. Today the Ministry is saying they are making all possible efforts, but didn't say that they still think the efforts will fail and a default is inevitable.  Look for the next snag in the bailout to come from growing opposition in Holland.  If I was them, I would be annoyed that their invaluable contribution seems to be taken for granted and that no one is reaching out to them in spite of their importance.