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Capital Context Update: Debt Down on a Dull Day
From Capital Context
Only Asian FX is weaker against the USD since Thursday's close but Silver was the clear star of the day with some serious swings
Somewhat impressively, volumes managed to tail off even more incredibly on this RoW holiday as S&P futures traded 1mm contracts less than the recent average, and NYSE aggregate volume was around 75% of recent average levels. Stocks managed to hug the VWAP (and unch line) as we pointed out in the
Midday Movers
today was a huge possibility and credit markets stayed at their wides of the day all afternoon - just barely wider. Equities (unch) managed to algorithmically outperform credit (wider) and un-sync from correlation and vol on the day amid rather tepid conditions.
Silver was the star of the day (until NFLX earnings after-hours generated some serious rebates) with an always predictable margin hike adding to the excitement into the close. The USD is still weaker vs all of our comparisons from Thursday's close (as seen in the upper chart) except for Asian FX which is very marginally weaker (ADXY in the chart).
We discussed the relative selling pressure we were seeing in CDS and secondary bonds and the relative strength in Treasuries early on today and that theme remained all day though the afternoon saw some buyi8ng come back into financial bonds. Putting two and two together with modestly stronger FX and weaker Silver makes for an interesting derisking perspective but on such a low volume day, we are not easily convinced.
Macro prints were anything but supportive and while we did sell-off a little in stocks early on, the machines were in charge as we reached back up to VWAP and clung within 1-2pts of it for the afternoon. We have shown these charts many times (and discuss them with some of our clients) but it is fascinating just how many times the VWAP-reversion algos and standard-error bands (of VWAP) will contain price action on both quiet and active days.
S&P futures clung to VWAP and its standard error bands - in our view showing more algo-driven sensibilities than any marginal risk-taking human.
The reason we highlight it is simple - all too often equity indices provide little real insight into the real action occurring under the covers in global risk allocations - or put more simply, following shifts in the capital structure context (debt, equity, and vol) from a bottom-up perspective intraday (and on broader time-frames) can often signal interesting shifts in regimes.
This is why we spend so much time looking at intra and inter-asset relationships and furthermore enables us to scrape away some of the noise in search of signals. On a day such as this, we
trust
the credit markets more than the equity markets (with their lack of algo-driven reversion behavior and potentially larger more professional players involved).
In
credit
we opened modestly tighter from Thursday's close and did nothing but widen all day long to end the day at the wides of the session and a tad wider close-to-close in IG for the widest close since last Tuesday. HY opened unch and slipped very minimally lower in price (wider in spread), also ending at its widest since last Tuesday.
Perhaps most interesting was the flattening in 3s5s curves that was evident in both the indices as well as a majority of single-names today. HY saw 3Y 8.5bps wider vs 5Y 4bps wider (yes small moves but still). HY perhaps was driven by some index arbitrage at the 3Y level but the reflection in HY secondary bonds mirrored this with net selling in HY relative to net buying in IG (though we do note that much of the improvement from our Midday Movers comment in IG net flow was due to a reawakening of demand for financials debt.
Morgan Stanley and Wells Fargo issues were the most bid with longer-dated issues dominating short-dated - 7-12Y most bid versus <3Y most offered. Somewhat cleaning up the picture we note that MS CDS underperformed today and this region of maturities looked a little rich earlier on today relative to CDS-implied valuations - i.e. someone liked the look of some longer-dated basis trades. For this reason, we would not read too much into the re-emergence of the bid for financials - especially since
Treasuries
continued to rally into the close - extending the rotation theme that we discussed this morning.
Monolines, Builders, and broad finance names were weaker today in CDS land with insurers more mixed (looking like low beta preference) as breadth was quite negative in credit - around 3 wideners to each 2 tighteners and the same ratio in flatteners to steepeners in 3s5s - another concerned theme we have been highlighting recently. ABX tranche prices also dropped quite handily today making us wonder if that was maybe a little behind the moves in monolines/builders for hedgers.
Our broad
credit
index is marginally wider overall and it was clear that higher beta names were underperforming today in credit land (examples include Sabre Holdings, Community Health, MBIA, Amkor Tech, and Eastman Kodak). Some consumer finance names seemed to outperform (SLM, SFI) but there was little thematic move to talk of aside from high spread underperformance and more up-in-quality rotation in single-name credit. Telecoms, Tech, and Media were the worst performing sectors in aggregate while Capital Goods, Energy and Utilities were the best performers - certainly not the most risk-on of days.
In
vol
land, VIX was up on the day but it was all gap from the open and while implied correlation was up earlier, it drifted off as the day went on implying taht single-name vols were relatively bid as the day wore on. Interestingly this vol bid was most apparent in the lower beta names in our universe - suggesting some protection being bought on the 'safer' names while the riskier names (as we have already discussed) were being marginally unwound. SPY skews rose once again (OTM vols rose more than ATMs) and remain near record steeps in three-month (though less so in six-month) - QE2 end?
Credit and Equity moves normalized today showing Financials and Consumer Cyclicals credit outperforming and Transports disconnected.
Contextually
, 51% of CDS were wider in our capital structure universe while 60% of equities were down since Thursday's close. 92% of single-name vols rose though and that vol move was more evident in lower beta names (on average) than higher beta. We do point out that the largest rises in vol were in the crossover space (BBB to B rated names) with the better quality names seeing far less of a bid in vol - more rotation into quality. Equity was pretty mixed across qualities as was CDS with litle discernible credit quality theme bottom up.
Based on our framework, Basic Materials and Consumer Non-Cyclicals saw the best relative performance of credit over equities today while Transports, Utilities, and Consumer Cyclicals saw the worst credit performance relative to equity performance. CSCO, YUM, HSP, PLD, and WEN were among the most divergent in terms of credit underperforming expectations based on equity and vol moves. AVT, ABX, HIG, KMB, and CLX were moang the most divergent in terms of credit outperforming expectations on the day relative to the rest of their capital structure.
Bottom line
for us today was such a low volume day leaves us a little non-plussed with anything in equity-land and the fact that credit underperformed equities at the same time as Treasuries outperformed equities (beta-adjusted) makes us wonder if some risk-off was on hand ahead of Wednesday's Bernank-a-palooza. Up-in-quality remains in cash and synthetic credit and protection in vol seems bid again (for now) and for those that prefer their wealth effect in real terms, we kindly remind you that the S&P is now -0.12% YTD (adjusted for DXY).
No European or Asia coverage since markets were closed.
Index/Intrinsics Changes
CDX16 IG
+0.4bps to 93.65 ($-0.01 to $100.24) (FV +0.08bps to 91.11) (58 wider - 52 tighter <> 53 steeper - 70 flatter) - No Trend.
CDX16 HVOL
-0.86bps to 150 (FV -0.24bps to 149.9) (10 wider - 19 tighter <> 11 steeper - 19 flatter) - Trend Tighter.
CDX16 ExHVOL
+0.8bps to 75.86 (FV +0.17bps to 73.25) (48 wider - 48 tighter <> 54 steeper - 42 flatter).
CDX16 HY
(30% recovery) Px $-0.14 to $102.42 / +3.4bps to 440.5 (FV +2.42bps to 422.97) (60 wider - 35 tighter <> 45 steeper - 55 flatter) - Trend Tighter.
LCDX15
(70% recovery) Px $0 to $101.375 / -0.19bps to 232.27 - Trend Tighter.
MCDX15
-3bps to 141.5bps. - Trend Tighter.
ITRX15 Main
+0.25bps to 99bps (FV-0.01bps to 101.48bps).
ITRX15 HiVol
-0.13bps to 137.5bps (FV-0.39bps to 135.78bps).
ITRX15 Xover
+0.2bps to 364.2bps (FV-0.53bps to 353.89bps).
ITRX15 FINLs
-0.85bps to 133.9bps (FV+0.52bps to 135.98bps).
DXY
weakened 0.12% to 74.02.
Oil
fell $0.1 to $112.19.
Gold
rose $0.4 to $1506.65.
VIX
increased 1.08pts to 15.77%.
10Y US Treasury yields
fell 3.5bps to 3.36%.
S&P500 Futures
gained 0.02% to 1331.3.
Spreads were mixed in the US with IG worse, HVOL improving, ExHVOL weaker, and HY selling off. IG trades 1.8bps wide (cheap) to its 50d moving average, which is a Z-Score of 0.6s.d.. At 93.65bps, IG has closed tighter on 122 days in the last 595 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 0.8s.d. and at 440.45bps, HY has closed tighter on 60 days in the last 595 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 1.1bps. Interestingly, based on short-run empirical betas between IG, HY, and the S&P, stocks outperformed HY by an equivalent 3.4bps, and stocks outperformed IG by an equivalent 0.4bps - (implying IG underperformed HY (on an equity-adjusted basis)).
Among the IG16 names in the US, the worst performing names (on a DV01-adjusted basis) were Transocean Ltd. (+7.53bps) [+0.06bps], Barrick Gold Corp. (+5.25bps) [+0.04bps], and MDC Holdings Inc (+3.83bps) [+0.03bps], and the best performing names were SLM Corp (-8.94bps) [-0.07bps], RR Donnelley & Sons Company (-5bps) [-0.04bps], and Whirlpool Corp. (-3.53bps) [-0.03bps] // (absolute spread chg) [HY index impact].
Among the HY16 names in the US, the worst performing names (on a DV01-adjusted basis) were Sabre Holdings Corp (+40.42bps) [+0.39bps], Community Health Systems Inc (+27.56bps) [+0.26bps], and MBIA Insurance Corporation (+37.19bps) [+0.26bps], and the best performing names were Boyd Gaming Corporation (-15.83bps) [-0.15bps], Realogy Corporation (-15.93bps) [-0.14bps], and Goodyear Tire & Rubber Co. (-12.99bps) [-0.13bps] // (absolute spread chg) [HY index impact].
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Always love your updates. Thanks again.
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Have you read any of Ruppert's work or seen the documentary Collapse? If so, my apologies, but if not, it's a must see.
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HEY MR. CONTEXT
You seem like a saavy guy. Look at the tinfoil hat article contributed by a reader about continuously updated real time dynamic inventory control. I think a financial search engine has just been developed that can capture and continuously update prices all through the supply chain. You can frontrun with it too. Take real time inflation measurements by industry, country, city, come to think of it you can use it to arbitrage too. Can you think of other uses you might put a continuously updated total price aggregator to? This might be the first practical use of probability theory in input cost management other than microsoft's fare predictor. It is Dr. Rigobon's financial search engine, the billion price project.