Capital Context Update: Credit Where Debit Is Due

Tyler Durden's picture

From Capital Context

S&P futures were down notably
in the pre-markett on EUR concerns.
We note the last hour found
support at VWAP and opening
day session levels.

Stocks closed down, though well off their worst levels of the day, but underperformed credit quite notably once again on a beta-adjusted basis as regime shifts for many stat arb algos were snapped early on and killed the market for much of the middle of the day in stocks. A late day surge back up to the opening level of the day session, which coincided closely with the S&P futures VWAP (the volume-weighted average price of the day that so many HFTs use), left Treasuries still the notable underperformers despite so many people claiming victory over the ratings agencies thanks to the dollar and UST moves.

We discussed some of the reasoning for these moves in the
Midday Movers

post, but critically there were notable regime shifts today that will bear watching for follow through as we remind readers that the US equity and credit markets were down pretty good early on anyway thanks to the continued denial-denial-denial in Europe (most notably Greece). The break between JPY crosses and the dollar, the 10Y TSY to ES link, 2s10s30s correlation to ES, Bunds vs TSYs, and gold/silver vs the dollar are all notable shifts today but once again the VIX/VXV term structure steepness of last Friday that we warned about as extreme and the continued medium-term richness of stocks to credit keep us from aggressively buying any dips here (yes our tongue is in our cheek a little there).

While we pulled back off the tights in credit as the major indices (HY and IG) followed S&P futures for the most part in the afternoon, this was still the biggest widening day in both indices since 3/21 and it is worth noting that the last time the S&P was around this range, VIX was very slightly higher and HY spreads were 12bps tighter. IG traded up to 97bps offered early on, just shy of the 97.5bps contract wides and back to 3/24 levels while HY traded at its lowest since inception of the series 16 index down to $101.685 (or ~459bps) before rallying back up to the contract's inception levels around the close - which we found coincidentally interesting.

What was most contextually notable was that while equities were dropping early on and dropped rapidly at the announcement of the S&P outlook change (around 10 S&P pts in a couple minutes), credit gapped aggressively across the chasm, took out contact wides from Friday, and kept going. HY managed to get back to offered at the bid pre-drop before turning back down into the close and so did IG - the point being we filled the gap from the pre-outlook-change in credit and then turned back wider but were unable to in stocks.

Notice 10Y Treasury's flatline
and underperformance relative
to the rest of the risk
market in the afternoon.

Stocks also failed to get back in line with Treasuries which while they staged a valiant attempt, after the initial spike higher in yields, to rally, we note the flatline performance for much of the afternoon as US equities, oil, and EUR rallied in sync once again. Did we just lose another algo regime? 2s10s30s disconnected greatly at the momemnt of the annoucnement and then spent the rest of the compressing the relationship almost perfectly - which makes us more confident that there is some real money behind that new relationship (which remember was not around a week or so ago).

In credit land, breadth was very negative as one would expect with around 12 wideners to every tightener in 5Y CDS and notably curve flatteners in 3s5s outpaced steepeners (which is unusual on a day like this where liquidity tends to pool on 5Y and the rest of the curve gets left behind for reracks overnight). We have noted the 3s5s flattening in the index for a week or two as a concern and that is clearly shifting back to the single-names now too - perhaps many managers just waiting for the catalyst to shift. Financials were the major underperformer in CDS land and did not recover as much (relatively sopeaking) as the indices or non-financials from their wides of the day - though did rally off their wides in 5Y while 3Y gapped wider and stuck there (again 3s5s flattening).

In bonds, financials saw net selling pressure from the buy-side as did Communications credits modestly with Energy notably bid on the day. Interestingly given the steepening in 2s10s and 2s30s TSYs, we saw the long-end of the corporate bond market being bought and the short-end being sold - this knee-jerk reaction to rapid rate rises is often seen as corporates 'generally' outperform on spread compression and price stability at the long-end on these moves BUT we worry that this is premature and the velocity of today's move may have mis-stepped a few managers reaching for yield and relative stability of corps over TSYs. The 1-3Yr region was the most sold on the day which fits with the short-end widening/flattening in CDS also. We wonder if we will see longer-dated vol players stepping in to arb the short-dated CDS market here with the idea of 'wings' trades outperfoming in this very binary future we face (Puts vs CDS or dividend-yield stocks vs CDS trades tend to perform the best in extreme scenarios so watch your sell-side desks start selling you on the ideas - we will publish this week some ideas on this trade).

Top-down, VIX opened gap higher and slid lower all day as did VXV but the steepness flattened a bit more into reality. Implied correlation dropped - which we suggest once again is due to the disconnect in financials which we talked about a week or two back impacting the clustering nature of the sector correlations recently. We have seen notable rises in dispersion in credit recently and slow trends down in credit implied correlation and we think sector differences are driving equity implied correlation lower also. It is worth noting that while bottom-up vols did drop from the opening reracked levels they did not drop nearly as much as the index levels and continued to follow the path of up-in-quality vol compression.


, only a very few names managed gains in both equity and credit today (an interesting bunch - MAR, TOL, HOT, DHI, PEP, and SVU) as homebuilders were interestingly near the top on the list of better performers in credit (which we suspect was related to the underperformance of the CMBX and ABX tranche markets as well as the higher beta exposure in some of the credit indices). Every sector was in agreement between credit and equity with a deteriorating move today as we note financials, leisure, and media were the worst beta-adjusted in credit relative to stocks on the day. Capital Goods, Utilities, and Consumer Noncyclicals performed the relative worst in stocks versus credit.

The up-in-quality theme in credit is increasingly leaking into vol as we saw much less impact higher in vols in better-rated credits than in lower-rated credits. This was also the picture in credit though we did see the very highest rated names underperforming (financials?). This picture was somewhat different in equity-land where BB-rated and below names saw their stocks drop far less than A- rated and above names - once again we think this is to do with both financials dominating performance as well as the typical ratings/momentum correlation unwind.


: while there were plenty of significant shifts today, and we exited our very profitable
ETF-based capital structure arb

, we remain of the opinion that stocks have room to the downside and are not heeding the risks being called out from the archaic corners of the credit and vol space. We suspect a few algos might have been washed out early on today and while FX vol continues to rise, sharpe ratios will reduce the desire for FX-based carry leverage. Watch 2s10s30s for signals, HY credit for flows, and stay hedged in the A-List (which has outperformed recently as we expect it to do - just as the long-short book we track done considerably better).


Obviously the story of the day - oh yeah aside from the USA elephant in the room and Goolsbee's 'helpful' thoughts - was the continued destruction of any credibility for any European politician. There was littel to no let up in selling pressure as CDS and bond spreads (and yields) drifted higher all day and saw no help from any US recovery in the afternoon.

The yields of the PIIGS continue
to increase and some break
new highs - note Spain
diverging friom Italy also.

SovX closed at the wides of the channel of the last 3 months - back at mid-Jan levels while many of the underlying names broke to new record wides including Greece which traded over 1300bps early in the day for 5Y protection. Echoing the Midday Movers comments, there was widespread selling among every sovereign (though we note that USA has shifted back notably wide of Germany - which widened also today - to its widest difference in three months). This time though it did catch on and the contagion spread to non-financials more than it has in recent weeks. CEEMEA sovereigns were alo very weak today - double-whammied by the contagion and oil price drops early on.

Main Ex-Financials widened 3.5bps (the biggest single day move since inception of this contract) which we have not seen much of as it has tended to be segregated in financials recently. The spread between senior and subordinated financials rose by 6bps - now 20bps wider on the week and broke back above 100bps (to 106bps). XOver and FINLs tracked wider and underlying single-names kept pace with the index moves but we note that Main underperformed intrinsics on the day and still remains over 2bps rich - we suspect the 'cheapness' of XOver and richness of Main points to the popularity of the decompression trade and while IG (in the US) is not as rich, HY remains 10-14bps wide of fair-value in 5Y and 5-8bps tight in 3Y (again suggesting our flattener idea is catching on).

Banks dominated the weakest performers and we note Glencore (so much in the news with its IPO) is also underperforming. Only Utilities and very low beta credits outperformed today in Europe - Henkel, LVMH, and Suedzucker were among them.


Same story as the others - banks were underperformers and the rest of corporate credit and sovereign risk tended to trend along wider. Interestingly Japan outperformed today (well was unch anyway) as Asia ex-Japan widened a notable 3bps - slightly underperforming Asian sovereigns which averaged 2.5bps decompression.

Aussie was more mixed but saw a similar theme though moves were minimal at best as the ITRX AUS index widened around 1bps.

Index/Intrinsics Changes


+1.5bps to 95.75 ($-0.05 to $100.16) (FV +1.45bps to 94.19) (104 wider - 11 tighter <> 51 steeper - 72 flatter) - No Trend.


+2.1bps to 155.7 (FV +2.38bps to 154.45) (24 wider - 3 tighter <> 11 steeper - 18 flatter) - No Trend.


+1.31bps to 76.82 (FV +1.16bps to 75.87) (80 wider - 16 tighter <> 55 steeper - 41 flatter).


(30% recovery) Px $-0.44 to $102 / +10.7bps to 450.7 (FV +6.89bps to 438.38) (84 wider - 9 tighter <> 31 steeper - 64 flatter) - Trend Wider.


(70% recovery) Px $-0.22 to $101.375 / +5.63bps to 242.85 - No Trend.


+4bps to 152bps. - No Trend.

ITRX15 Main

+4.35bps to 102.1bps (FV+3.3bps to 104.1bps).

ITRX15 HiVol

+4.04bps to 140.04bps (FV+4.28bps to 138.79bps).

ITRX15 Xover

+13.64bps to 381.64bps (FV+12.07bps to 368.41bps).


+7.38bps to 138.88bps (FV+7.63bps to 142.67bps).


strengthened 0.89% to 75.5.


fell $2.26 to $107.4.


rose $9.65 to $1496.35.


increased 1.64pts to 17%.

10Y US Treasury yields

fell 3.7bps to 3.37%.

S&P500 Futures

lost 1.36% to 1300.8.

Spreads were broadly wider in the US as all the indices deteriorated. IG trades 4.4bps wide (cheap) to its 50d moving average, which is a Z-Score of 1.4s.d.. At 95.75bps, IG has closed tighter on 155 days in the last 591 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. HY trades 18.1bps wide (cheap) to its 50d moving average, which is a Z-Score of 1.5s.d. and at 451bps, HY has closed tighter on 77 days in the last 591 trading days (JAN09). Indices typically underperformed single-names with skews widening in general.

Comparing the relative HY and IG moves to their 50-day rolling beta, we see that HY underperformed by around 2.3bps (or 21%). Interestingly, based on short-run empirical betas between IG, HY, and the S&P, stocks underperformed HY by an equivalent 13.3bps, and stocks underperformed IG by an equivalent 3.6bps - (implying IG outperformed HY (on an equity-adjusted basis)).

Among the IG16 names in the US

, the worst performing names (on a DV01-adjusted basis) were SLM Corp (+8bps) [+0.06bps], American International Group, Inc. (+5.34bps) [+0.04bps], and Anadarko Petroleum Corp. (+5bps) [+0.04bps], and the best performing names were Toll Brothers, Inc. (-2bps) [-0.02bps], Du Pont E.I. de Nemours & Co (-1.24bps) [-0.01bps], and Autozone Inc. (-1.02bps) [-0.01bps] // (absolute spread chg) [HY index impact].

Among the HY16 names in the US

, the worst performing names (on a DV01-adjusted basis) were Community Health Systems Inc (+41.44bps) [+0.39bps], Energy Future Holdings Corp. (+43.01bps) [+0.28bps], and PMI Group Inc/The (+34.24bps) [+0.28bps], and the best performing names were Nova Chemicals Corp. (-41.25bps) [-0.43bps], Liz Claiborne Inc. (-10.51bps) [-0.1bps], and CSC Holdings, LLC (-5bps) [-0.05bps] // (absolute spread chg) [HY index impact].

For those looking for entry levels in IG and HY, our pivots suggest short credit at 97.125bps in IG and 460bps in HY and long credit at 93.5bps in IG and 436bps in HY with stops at 95.25bps for IG and 447bps for HY. From Friday's levels we would be short HY and IG credit at 456bps and 96bps respectively with stops at 447bps and 95.25bps respectively

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redpill's picture

The homebuilder buys must be a "the worst is over" bet, but I simply cannot understand wanting to hop into stocks for companies that are going to be in for an extremely challenging industry for the foreseeable future.  Especially when one considers eliminating the mortgage interest deduction is likely going to be an idea floated repeatedly in the context of tax "reform".


Dejean Splicer's picture

I'm not sure I agree with you. If some 'natural' events destroy home inventory levels then what?

Tornado, earthquakes, hurricanes, I'm sure you understand.

Then the US economy can get going again. Right?

Ask yourself what would you do if you were backed into a corner and had to ramp?

Short the hell out of the big insurers / re-insurers.

~D'jean Splicer

redpill's picture

Waiting for a natural disaster is hardly an investment strategy.  Their margins will be increasingly squeezed as mortgage finance becomes a wasteland and new home buyers become fewer and farther between.  Home ownership will become seen as being a encumbrance instead of a dream; renting will remain the attractive choice for an entire generation for its relative lack of obligation.  Sure there will be operational niches, which is why Toll outperforms the others, but as a sector I don't see the attraction, and for myself I'd rather be investing in an average company in a good sector than a good company in a terrible sector.

Dejean Splicer's picture

It's either going to be 'natural' which many astute observers question. Or it's going to be good old fashion 1970's style Jewish Lightning and given the over fluoridated population I'm betting on the 'natural' disasters.

The roof, the roof, the roof is on fire..... Probably won't be a popular song in 2018.

Take your pick. I'll be short. See you at the finish line.

topcallingtroll's picture

There are some good prices out there for cash customers who know their real estate and want income producing properties.

Everyman's picture

We already had an EPIC one, the Great East Japan Quake and Tsunami.  The Fukashima Dai Ichi plant meltdown is just a sidebar.  The reality is that the ENTIRE MANUFACTURING CENTER IN JAPAN IS SCREWED.  What is not broken is crippled because of lack of power and ONGOING AFTERSHOCKS.

What did the market do about that "natural disaster"???

They ignored it, just like every other bad piece of news or data.  They just fucking IGN ORED it.  These pricks need to be beaten to within an inch of their fucking lives for the damage they have done to our economy and the world's economy.

disabledvet's picture

"they own land" and as such (even if it is the desert of the entire state of Arizona) have value.  I see ads now for "cheap houses in Arizona and El Paso (2nd safest city in America!)."  Eventually "collapsed prices will have a positive impact" especially given the inflationary policies of our Fed.  I'm not sure I'm ready to move to El Paso (it's sits across from the most violent city in North America) but I have no doubt "someone else will." does solve the problem of the heating bill--and what to do with all those guns and ammo that Americans are stockpiling.

Gimp's picture

When I think of Tiny Tim the classic line by Paul Newman in the movie "The Verdict" comes to mind as Newman slams the corrupt judge in his chambers with:

"I know about you, your just a bag boy for the big boys downtown"..

Iam_Silverman's picture

"Among the HY16 names in the US , the worst performing names (on a DV01-adjusted basis) were Community Health Systems Inc (+41.44bps) [+0.39bps], Energy Future Holdings Corp. (+43.01bps) [+0.28bps]"

Why the poor showing for EFH?  Didn't they just "renegotiate*" a large part of their near term maturity debt?


* de-facto default.

Saxxon's picture

Lemmings exhibit a similar behavior.

americanspirit's picture

I don't usually post the same comment on different ZH threads but I feel obliged to make an exception here. No offense intended - except of course to Beelzebub Ben.

That good old Russell 2000 is chock full of companies that depend (or used to depend) on Japanese suppliers, much smaller than Texas Instruments and therefore much more vulnerable. Won't it be interesting to see how long Uncle Ben can keep the R2000 inflated with his daily POMO blow job while these companies' supply lines shrivel along with their margins and revenues.

If you are invested in any R2000 companies, better do some checking around. Meanwhile, TZA at @ 37 looks like a bargain in the making.

medicalstudent's picture

best title ever.


credit prices should exceed cash prices.


apmex taking that lead.

natty light's picture

best title: I thought it was good too

topcallingtroll's picture

There actually is a free lunch in the credit market as we see again today.  High quality credits are priced very efficiently, perhaps to the point of being riskier than they should for their return, and vice versa for lower quality credits.  Low quality credits fell less today as would be expected in a market distorted by an arbitrary line between junk and not junk.

The same principle seems to work for professional gamblers.  There are fat tails in the long odds that are not efficiently priced.  The longshot horses, dogs, sports teams, etc tend to have their options priced too low compared to the return.  there are actually professional gamblers who make a living finding inefficiently priced odds, usually at the tails.

Zero Govt's picture

Funky charts that from the new Tron film?

The Axe's picture

Let me explain: If there is no exact news on a particular issue. Computers(algo) predict a stocks upward and downward movement vs SPY or ES then if the stock hasn't moved vs that math metric then they start to ramp it (example today would be OPEN) Same on the down side ----unless a stock has down side sponsorship(real seller) the computers ramp it. period