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August Credit Summary - Early Warnings
Credit markets were notably weak in August with HY underperforming IG, low beta deterioration, more curve inversion, and financials weaker, and all in the face of the continued rally in stocks. In the past we have seen credit anticipate and equity confirm - certainly credit markets are off their Utopian levels while stocks maintain them.
August was a fascinating month for the markets with lots of volatility, investing seemingly a binary decision of risk-on/risk-off, and everything becoming one trade - buy risky stuff or sell risky stuff. The dollar weakness/stock strength story continues to amaze but remember our recent point on how this relationship is becoming more and more asymmetric as the month wore on - this worries us considerably as increasingly aggressive dollar selling is required to jump start stocks.
Most notably, IG12 was over 8bps wider in August and HY12 68bps wider while stocks (S&P) managed to gain around 3%. Perhaps most notably, the USD was only marginally weaker, oil as good as unch (on the rolling front month contract), VIX flat, and gold a tad lower in price. 10Y TSYs were almost 8bps lower in yield (TSY buying and stock buying as corporate debt sold off?).
ExHVOL (our preferred trade) has performed very well as it widened over 12bps on the month to around 70bps and we note that indices in general underperformed intrinsics (which widened the skews in HY but narrowed in the rest).
IG12's curve was flatter (more inverted) as we saw intrinsics steepen up quite considerably in 7s10s (or 5s10s) while 5s7s was pretty flat.
Thanks to AIG's remarkable rally and strength in junk, high beta credits outperformed low beta dramatically but both were considerably wider on the month. Interestingly (at least for us) the widest 5 names (CIT/AIG/ILFC/TXT/HIG) in IG12 at 07/31 were the major outperformers in August as dispersion dropped dramatically in IG and these names alone kept IG intrinsics almost 7bps tighter on the month.
CONSumers were the month's worst performers as M, JCP, and FO were around 50bps wider. TMT was close behind with CMCSA and TWX worst as ENRG and INDUstrials were about the same but considerably wider. Financials outperformed non-financials on the month but the tails were waht helped the most as GS and MS were considerably weaker in credit (even as their stocks held up). BAC, COF, and WFC were wider while Citi improved modestly. Monolines were mixed with ABK way wider and MBIA tighter as insurers were also mixed. The financial senior-sub differential decompressed 6bps on the month
High spread builders underperformed low spread builders but on average they were all weaker in the face of significant strength in homebuilder stocks. ABX and CMBX prices were generally lower on the month with more recent vintages underperforming in ABX and outperforming in CMBX.
Our Aussie Index was basically unch for the month with banks underperforming and Asia was modestly better on the month again with banks underperforming. Interestingly XOver was modestly tighter on the month with XOver-Main compressing as HY-IG decompressed as we note ExHVOL went from over 7bps rich to LoVOL to 4bps cheap. MCDX and EM11 were both tighter on the month but the majors sovereigns saw mixed signals with USA and Japan significantly tighter as Spain and Italy were dramatically wider. Financial and Sovereign risks (CRI and GRI) were both notably wider with financials underperforming as the risk transfer (post TARP) seems to swing the other way.
Commentary compliments of www.creditresearch.com
Index/Intrinsics Changes for August
CDR LQD 50 NAIG +10.01bps to 101.93 (43 wider - 6 tighter <> 34 steeper - 15 flatter).
CDX12 IG +8.74bps to 119.5 ($-0.29 to $99.19) (FV +6.6bps to 129.58) (111 wider - 12 tighter <> 94 steeper - 30 flatter) - Trend Wider.
CDX12 HVOL -4.66bps to 275 (FV -12.52bps to 324.71) (22 wider - 8 tighter <> 24 steeper - 5 flatter) - Trend Wider.
CDX12 ExHVOL +12.97bps to 70.39 (FV +12.21bps to 74.49) (89 wider - 6 tighter <> 25 steeper - 70 flatter).
CDX11 XO +9.8bps to 311.4 (FV +39.84bps to 360.11) (29 wider - 5 tighter <> 17 steeper - 17 flatter) - Trend Wider.
CDX12 HY (30% recovery) Px $-2.19 to $88 / +68bps to 840 (FV +20.38bps to 754.18) (80 wider - 14 tighter <> 20 steeper - 74 flatter) - Trend Wider.
LCDX12 (65% recovery) Px $-0.46 to $92.94 / +18.22bps to 742.86 - Trend Wider.
MCDX12 -32bps to 125bps. - Trend Tighter.
CDR Counterparty Risk Index rose 11.21bps (10.33%) to 119.71bps (10 wider - 4 tighter).
CDR Government Risk Index rose 2.34bps (5.76%) to 42.96bps.
DXY weakened 0.28% to 78.13.
Oil rose $0.28 to $69.73.
Gold fell $2.85 to $951.15.
VIX increased 0.09pts to 26.01%.
10Y US Treasury yields fell 8bps to 3.4%.
S&P500 Futures gained 3.59% to 1019.7.
August's Biggest Movers
The month's biggest absolute movers in IG were Constellation Energy Group Inc. (+87.52bps), Masco Corp. (+53.74bps), and Macy's, Inc. (+53bps) in the wideners, and American International Group, Inc. (-581.36bps), CIT Group Inc (-197.98bps), and Textron Financial Corp (-129.77bps) in the tighteners. The month's biggest percentage movers in IG were Autozone Inc. (+76.27%), Constellation Energy Group Inc. (+62.74%), and Time Warner Cable Inc. (+56.67%) in the wideners, and American International Group, Inc. (-39.12%), Textron Financial Corp (-21.28%), and XL Capital Limited (-17.07%) in the tighteners.
In the more financial-heavy CDR NAIG LQD 50 index, sentiment is very bearish with 44 wider to 6 tighter, and 34 steeper to 15 flatter as 24 of the 50 credits have inverted curves. The biggest absolute movers were Goldman Sachs Group Inc (+41.5bps), Comcast Corp. (+40.5bps), and Nordstrom Inc. (+35bps) in the wideners, and HSBC Finance Corporation (-102.5bps), Citigroup Inc (-13.75bps), and Allstate Corp (-8.5bps) in the tighteners. The biggest percentage movers in the CDR NAIG LQD 50 were Autozone Inc. (+76.27%), VF Corporation (+50.46%), and Comcast Corp. (+46.29%) in the wideners, and HSBC Finance Corporation (-28.87%), Allstate Corp (-9.44%), and ACE Ltd. (-8.89%) in the tighteners.
In the names of the HY index, this month's biggest percentage movers were Energy Future Holdings Corp. (+54.58%), Windstream Corporation (+48.7%), and Fairfax Financial Holdings Limited (+33.73%) in the wideners, and American Axle & Manufacturing Inc (-78.84%), Realogy Corporation (-30.71%), and Clear Channel Communications Inc (-28.85%) in the tighteners. The largest absolute movers in HY were AMR Corp (+1968.96bps), Energy Future Holdings Corp. (+603.49bps), and Level 3 Communications Inc. (+328.83bps) in the wideners, and American Axle & Manufacturing Inc (-4245.28bps), Clear Channel Communications Inc (-1201.25bps), and Realogy Corporation (-924.3bps) in the tighteners.
The CDR Counterparty Risk Index Series 2 (of brokers and banks) rose 11.21bps (or 10.33%) to 119.71bps. Goldman Sachs Group Inc (41.5bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Goldman Sachs Group Inc (41.92%) is the worst (relative) performer. Citigroup Inc (-13.75bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and Citigroup Inc (-4.8%) is the best (relative) performer.
The CDR Aussie Index fell -0.2bps (or -0.2%) to 104.63bps. Crown Limited (16.29bps) is the worst (absolute) performer, whilst Crown Limited (15.26%) is the worst (relative) performer. Amcor Limited (-19.49bps) is the best (absolute) performer, and Amcor Limited (-16.31%) is the best (relative) performer.
The CDR Asian Index fell -3.85bps (or -3.39%) to 109.88bps. Bank of China (41.61bps) is the worst (absolute) performer, whilst Bank of China (46.55%) is the worst (relative) performer. Promise Co Ltd (-52.64bps) is the best (absolute) performer, and Kobe Steel Ltd (-39.51%) is the best (relative) performer.
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Debt always leads equity on the downside, look out below
i think there needs to be a decisive move toward 30 in the VIX to get credit wider.
What are we looking for on this side of the aisle?
Widening spreads between AAA and junk?
Overall increases in interest rates as perceptions of risk heighten?
can't even understand the first sentence. Keep up the good work. Have to take more vitamins.
I think he's one of the new high performance prototypes from Area 51