Capital Context Update: Ebbs, Flows, and Surges

CapitalContext's picture

From Capital Context

S&P futures closed off their lows but VWAP was the great redeemer in the end.

Stocks and spreads were weaker close to close today with HY underperforming IG and equities underperforming credit (beta-adjusted). Following our
Midday Movers

comments and the close of Europe, US risk assets managed to creep off their wides but we note (as indicated in the chart above) that S&P futures merely regained VWAP indicating a significant lack of strength.

VWAP closed -8pts from yesterday's closing VWAP having slid all day from a day-session open pretty much unch from the close last night (and interestingly the peak volume price - blue line - was also close to the VWAP line suggesting traders had some comfort auctioning at these levels).

The 0.7% or so drop in SPY though was, for the second day in a row, a notable underperformance relative to the broad credit market (albeit with the latter losing some ground today also).

There is still plenty of room to go before equities regain any kind of fair-value relative to credit top-down (as we
discussed yesterday

) and we are happy to say our

position is over 10% into the money already having dropped below $16 for a time today (target is $15 from an entry at ~$19).

Relative euphoria over the Finnish quasi-decisions and Portuguese bailout 'agreement', that we commented upon earlier, saw spreads in sovereigns and financials get a boost across the pond (
though non-financials notably underperformed financials suggesting the austerity wealth transfer being priced in

) and strengthen the EUR up over 1.49 for a time but once it closed, the EUR lost ground to the USD and DXY rallied back above 73. The USD weakness early on was greeted with Treasury buying somewhat conversely but we wonder if the dealers are getting a little over-stuffed from filling offers for USD and just sweeping them into TSYs for safekeeping (and to pick up some roll and carry while they are at it).

Vol markets

were tempestuous today with VIX spiking early and then drifting off which was seen by many as a sign of market resilience. However, as much as we want to believe that, we let the data do the talking and the initial spike in VIX coincided with a notable spike in implied correlation suggesting that the early and very weak macro data caused a
blanket overlay of protection

to be bought (hence VIX - index options vol) was bid relative to the less liquid single-name protection. As the day went on, we saw index protection unwound and rotated into single-name protection as implied correlation and VIX dropped.

This fits with our recent theme that we have seen lower beta (safer/quality especially) names being protected while higher beta (momo/lower quality) actually being net sold when we look at vol in the context of credit and equity. This dash for an overlay also sparked the first pick up in the skew in almost two weeks and largest rise in 3 weeks.

Secondary bond activity was relatively busy but quite balanced

(i.e the net selling/buying to dealers was almost equal) though 6 of the 10 industries saw net selling pressure with non-cyclicals and industrials at the top of that list (the former topped by RRD sales - as we discussed this morning). The
punishment meted out to0 RRD (and GATX for that matter) for their relatively shareholder-friendly behavior today was as aggressive as we suspected it would be

when it came in general and we remind readers of our ignorance of Modigliani and Miller when it comes to the practical matter of managing capital structure value relationships.

HY saw its biggest day to day widening since 4/18

and we basically crossed back over the gappy (

) snap tighter from last week (as much as we nate to say we told you so) to close at its widest since 4/26. IG also turned in a decent move wider (though
HY relatively underperformed

based on empirical betas) as both manage 3 days in a row of widening.

HY was once again struggling with the front-end as 3Y HY widened an impressive 11bps, back to one-week wides, and flattening the 3s5s further. The 3Y index shift was very much against the intrinsics flow and we suspect there was a decent amount of dealers soaking up index arb activity in there today as the skew in 3Y is at its narrowest in weeks now. A flattening of the front-end is worrisome for HY issuers as they have benefitted from the liquidity and yield demand that investors seem to have in reaching for lower quality but unwilling to extend durations - interest expenses will be rising.

Ugly data on CMBS delinqs saw some
interesting shifts in CMBX tranche land

- AAA/AJ underperforming and BBB outperforming. This kind of twist trade is a clear example of a bias to a higher correlation trade - i.e. it suggests investors in these tranches
believe a rise in default correlation is due

- a more
systemically worrying

thing than an idiosyncratic issue. We tend to agree though of course who knows at what level any bank has any of this marked-to-market.

Monthly breakdown of outstanding debt (principal and interest) owed by USA Inc. May and June are huge refi months!

Bottom line

today is we saw more higher beta underperformance in equity and credit land, more equity underperformance of credit, more flattening in the front end of credit curves, more secondary bond net selling, vol themes continuing to diverge between high and low beta names, a pick back in vol skews (downside protection bid), and significantly harsh punishment (relatively speaking) for shareholder-friendliness in credit land. So not much to yell for joy about.

Yes, the dollar managed to regain unch and silver and copper (and gold today) lost some more ground, but we suspect much of the rumor/furore over who is selling (just ignore it if they are hedging huge positions or mining ops! - wouldn't you??), is just that and realistically a core gold position seems like common sense as we begin to see both a weakness in US macro and global leading indicators and the potential for pain from the dichotomy of a ultra-close US debt ceiling and the need to refi over $900bn in the next two months (see USA debt distribution chart above), and chatter from Fed heads of a need to remain easy in policy ebbing out today (despite their heroic views of 2011 and 2012 GDP growth and unemployment). We remain hedged in the A-List and short equities relative to credit here.

Apologies for the lateness and brevity of today's note.

Index/Intrinsics Changes


+0.81bps to 89.75 ($-0.03 to $100.38) (FV +0.99bps to 88.8) (73 wider - 19 tighter <> 46 steeper - 75 flatter) - No Trend.


+1.7bps to 149.8 (FV +2.52bps to 147.02) (18 wider - 6 tighter <> 13 steeper - 16 flatter) - No Trend.


+0.53bps to 70.79 (FV +0.51bps to 71.12) (55 wider - 41 tighter <> 62 steeper - 34 flatter).


(30% recovery) Px $-0.25 to $102.81 / +6bps to 431.3 (FV +0.1bps to 412.73) (52 wider - 33 tighter <> 45 steeper - 54 flatter) - Trend Wider.


(70% recovery) Px $-0.19 to $101.375 / +4.77bps to 238.75 - Trend Wider.


+1.75bps to 126.75bps. - Trend Tighter.

ITRX15 Main

0bps to 96.25bps (FV-0.59bps to 97.8bps).

ITRX15 HiVol

-0.5bps to 134.5bps (FV-0.64bps to 131.17bps).

ITRX15 Xover

+4bps to 356bps (FV-0.63bps to 343bps).


-2.12bps to 128.88bps (FV-1.81bps to 128.86bps).


weakened 0.03% to 73.12.


fell $2.24 to $108.81.


fell $18.77 to $1517.2.


increased 0.38pts to 17.08%.

10Y US Treasury yields

fell 3bps to 3.22%.

S&P500 Futures

lost 0.58% to 1344.3.

Spreads were broadly wider in the US as all the indices deteriorated. IG trades 2.4bps tight (rich) to its 50d moving average, which is a Z-Score of -0.9s.d.. At 89.75bps, IG has closed tighter on only 41 days in the last 602 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. HY trades 13.6bps wide (cheap) to its 50d moving average, which is a Z-Score of 0s.d. and at 431.3bps, HY has closed tighter on only 42 days in the last 602 trading days (JAN09). Indices typically underperformed single-names with skews mostly narrower.

Comparing the relative HY and IG moves to their 50-day rolling beta, we see that HY underperformed by around 2.4bps. Interestingly, based on short-run empirical betas between IG, HY, and the S&P, stocks underperformed HY by an equivalent 6bps, and stocks underperformed IG by an equivalent 1.8bps - (implying IG outperformed HY (on an equity-adjusted basis)).

Among the European IG names, the worst performing names (on a DV01-adjusted basis) were Alstom (+3.5bps) [+0.03bps], Holcim Ltd (+3bps) [+0.02bps], and Vinci SA (+2bps) [+0.02bps], and the best performing names were UniCredit SpA (-9.26bps) [-0.07bps], Banca Monte dei Paschi di Siena SpA (-7bps) [-0.05bps], and EDP-Energias de Portugal, S.A. (-6.75bps) [-0.05bps] // (absolute spread chg) [HY index impact].

Among the IG names in the US, the worst performing names (on a DV01-adjusted basis) were RR Donnelley & Sons Company (+45.25bps) [+0.33bps], GATX Corporation (+17.5bps) [+0.14bps], and Southwest Airlines Co. (+5bps) [+0.04bps], and the best performing names were Nordstrom Inc. (-3bps) [-0.02bps], Computer Sciences Corp. (-2.5bps) [-0.02bps], and Newell Rubbermaid Inc. (-2bps) [-0.02bps] // (absolute spread chg) [HY index impact].

Among the HY names in the US, the worst performing names (on a DV01-adjusted basis) were K Hovnanian Enterprises, Inc. (+44.82bps) [+0.34bps], Eastman Kodak Co. (+31.95bps) [+0.24bps], and Supervalu Inc. (+25.2bps) [+0.23bps], and the best performing names were Harrah's Operating Co Inc (-59.41bps) [-0.51bps], PolyOne Corp (-21.25bps) [-0.22bps], and Realogy Corporation (-24.41bps) [-0.21bps] // (absolute spread chg) [HY index impact].

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Myzery's picture

What sectors of the 950bln+ the US has to refi in May and June are under the most stress?