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Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura. Read More

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Kamakura Corporation
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Honolulu HI 96815

Phone: 808.791.9888
Fax: 808.791.9898
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Today’s forecast for U.S. Treasury yields is based on the July 18, 2013 constant maturity Treasury yields that were reported by the Board of Governors of the Federal Reserve System in its H15 Statistical Release at 4:15 p.m. Eastern Daylight Time July 19, 2013. The forecast for primary mortgage market yields and the resulting mortgage servicing rights valuations are derived in part from the Federal Home Loan Mortgage Corporation Primary Mortgage Market Survey ® made available on the same day.

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In this note we analyze the current levels and past history of default probabilities for Wells Fargo & Co. (WFC).  We compare those default probabilities to credit spreads on 400 bond trades in 25 different bond issues on July 17, 2013.  Assuming the recovery rate in the event of default would be the same on all bond issues, a sophisticated investor who has moved beyond legacy ratings seeks to maximize revenue per basis point of default risk from each incremental investment, subject to risk limits on macro-factor exposure on a fully default-adjusted basis.   We find that Wells Fargo & Co. bonds offer a very attractive ratio of credit spread to default probability risk. We analyze the maturities where the credit spread/default probability ratio is highest for Wells Fargo & Co. We also consider whether or not a reasonable investor would judge the firm to be “investment grade” under the June 2012 rules mandated by the Dodd-Frank Act of 2010.&am

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Trading volume in the bond and credit default swap markets are two of the key drivers of profit for major dealers like Bank of America (BAC), Barclays Bank PLC, BNP Paribas, Citigroup (C), Credit Suisse, Deutsche Bank, Goldman Sachs (GS), HSBC Holdings, JPMorgan Chase (JPM), Morgan Stanley (MS), The Royal Bank of Scotland Group PLC, and UBS (AG).  At the same time, the depth, breadth and efficiency of these markets are very important considerations for buy-side firms who do trade or who are considering trading in these markets.  This note analyzes the trading volume for both markets for the week ended July 12, 2013 and lists the top 25 reference names in both markets.

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In this note we analyze the current levels and past history of default probabilities for Hewlett-Packard Company (HPQ).  We compare those default probabilities to credit spreads on 311 bond trades on July 15, 2013.  Assuming the recovery rate in the event of default would be the same on all bond issues, a sophisticated investor who has moved beyond legacy ratings seeks to maximize revenue per basis point of default risk from each incremental investment, subject to risk limits on macro-factor exposure on a fully default-adjusted basis.   We analyze the maturities where the credit spread/default probability ratio is highest for Hewlett-Packard Company. We also consider whether or not a reasonable investor would judge the firm to be “investment grade” under the June 2012 rules mandated by the Dodd-Frank Act of 2010.

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In this note we analyze the current levels and past history of default probabilities for Oracle Corp. (ORCL), and we compare them to the credit spreads on secondary market trading in Oracle Corp. bonds on Friday, July 12. A sophisticated investor who has moved beyond legacy ratings seeks to maximize revenue per basis point of default risk from each incremental investment, subject to risk limits on macro-factor exposure on a fully default-adjusted basis.  We assume the recovery rate is the same for all bonds traded in this note. All other things being equal, maximizing the ratio of credit spread to the matched maturity default probability will achieve this objective.  As part of this analysis, we consider whether or not a reasonable investor would judge the firm to be “investment grade” under the June 2012 rules mandated by the Dodd-Frank Act of 2010.

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