Capital Context Update: Little Ado About Something
From Capital Context
Volume rose dramatically
as we sold off and disappeared
during the day session's
rally back to unch.
Another interesting day where headline performance comments will mask
what was really going on under the covers. The S&P 500 managed a
small gain on the day as did IG (investment grade) and HY (high yield)
credit spreads at the index level as VIX reached its lowest since 2/18 -
all good right? We hate to burst this bubble of ebulience, and we do
note that what positives there were at the index level were minute
anyway, but bottom-up painted a very different picture in credit and vol
land and as the chart opposite shows, equity volume dried up as we
rallied back to the green line.
An 'orrible morning in Europe (discussed in the
) combined with a decent miss on jobless claims and hotter than expected
core PPI sent us on a path lower pre-open today in S&P futures and
both IG and HY credit was gapping up to two-week wides. Within an hour
of the open, there was a bid to the market and while credit was not
playing the game out of the gate (like stocks were), it too got caught
up and indices slipped tighter - ending very modestly tighter on the day
as S&P futures closed with a late day languish into the red.
What was most interesting was the fact that the underlying single-names
in credit saw very negative breadth today and most critically we note
that the fair-value for the HY index (the weighted sum of the 100
components) reached its widest level since 1/10 and is now 60bps wider
than its tights in mid Feb. Year-to-date, the S&P is +4.5% or so but
IG and HY credit are as good as unch (carry aside) in spread terms and
credit has been widening (getting riskier) since mid-Feb in a relatively
We have discussed how secondary bonds have been showing less systemic
buying recently and have noted that the major liquid credit derivative
indices have been underperforming suggesting macro overlays being laid
out (protecting gains on considerably less liquid underlying bond/credit
portfolios with a more generic liquid hedge). Today saw considerable
underperformance among individual credits relative to the indices and we
suspect the unwind of idiosyncratic longs and systemic short hedges
(taking off the macro hedge piece by piece as you cover your underlying
longs) has started to occur.
This was the most notable divergence we have seen in a while
(weeks/months) and while it is not a red-alert, it is noteworthy to us
that credit market professionals are less comfortable with risk here. We
also saw 3s5s flatteners in IG and HY and while the indices are trading
modestly cheap (wide) of fair-value (and so some index arb may have
been at play), the underperformance of lower beta credits (over higher
beta credits) suggests perhapos investors looking for cheaper basket
There were seven wideners to every tightener today in credit markets and
while moves in general were not large (aside from the idiosyncratic
names we discuss below), they were under pressure all day - not
compressing from the open like the indices did. Dispersion rose once
again and the up-in-quality theme continues.
We find it fascinating that the pop in PPI which caused
(caused or was coincident with) to increase helped the 2s10s30s
butterfly, that we have been keeping an eye on, to increase. This
increase seemed to provide the juice for the rise in equities today and
as you can see in the chart opposite - the tick-for-tick moves in the
last few days (a new regime from the previous few months) is very
notable. We also note that GC repo popped 10bps today from very low
levels in overnight - did anyone hear the Fed doing reverse repos?
Anyway, TSY yields were all higher today 2s10s steepening and 10s30s
flattening (as auction fever hit once again at the long end).
Silver made new highs (above $42) and gold egded close as the Dollar (in it all its guises vs Majors, Asian
and Trade-weighted) lost ground and DXY is getting very close now to the 2009 lows.
A mixed picture contextually
but Consumer Noncyclicals
Financials and Media underperformed
relative to credit.
, credit and vol were much clearer about their directional view today
(deteriorating) than stocks (mixed) . Financials saw modest vol
compression but the rest saw vol increase on average at the sector
level. Tech, Energy, and Media were the worst (risk-adjusted) performers
in credit while Financials and Media were worst on average in stock
land (risk-adjusted). Interestingly equity outperformed credit
(divergently - as in equity rose and credit widened on average) in Basic
Materials, Consumer Noncyclicals, Energy, Healthcare, Tech, Telecoms,
and Utilities and the fact that Utes and noncyclicals were the best
risk-adjusted performers in stock land suggest less rotation out of
stocks and more rotation across sectors today.
Similar to our midday update, implied vol followed credit topday witgh
the better quality names (rated A and above) seeing modest spread
compression and vol decreases while lower quality (rated BB- and below)
saw vol increases and spread decompression. The picture in stocks was
mixed though lower quality names did underperform.
DYN, EK, HOV, HON, and THC saw the largest (risk-adjusted) deterioration
in credit today and SVU, TE, MCD, DTE, and SO were the best
risk-adjusted performers. DYN, SVU, and EK were once again at the top of
the list of divergences (credit considerably underperforming equity on a
risk-adjusted basis) while Shaw Communications, HAS, DELL, and HSP were
the most divergent witth compression in spreads and drops in stock
prices (basis adjusted). The divergences in that direction (credit
favorable, equity unfavorable) were dominated by releveraging names (or
event risk prone names) - LBO/M&A premium coming out?
The Bottom Line for us is that we feel an escalation of some derisking
is occuring in credit and we would remain comfortably hedged in any long
equity position (in fact our TAA model has started to drop the
weighting to equities recently). Many of the themes and suggested trades
of recent weeks are starting to gather pace - though nothing startling
yet - but under-currents in credit (and vol surfaces) suggest more than
the simple close-to-close unches in equity markets is underway.
-0.48bps to 94.52 ($0.02 to $100.21) (FV +0.91bps to 93.34) (100 wider -
10 tighter <> 63 steeper - 59 flatter) - No Trend.
+1bps to 154 (FV +1.34bps to 152.76) (26 wider - 3 tighter <> 20 steeper - 9 flatter) - No Trend.
-0.95bps to 75.74 (FV +0.77bps to 75.27) (75 wider - 21 tighter <> 52 steeper - 44 flatter).
(30% recovery) Px $+0.13 to $102.315 / -3.1bps to 442.7 (FV +6.32bps to
433.62) (91 wider - 8 tighter <> 36 steeper - 64 flatter) - Trend
(70% recovery) Px $-0.05 to $101.375 / +1.24bps to 239.9 - No Trend.
-0.5bps to 150bps. - No Trend.
-0.25bps to 97bps (FV+2.01bps to 100.29bps).
-0.02bps to 135.61bps (FV+2.06bps to 133.34bps).
+1bps to 369bps (FV+4.55bps to 359.3bps).
-1.25bps to 128.25bps (FV+4.92bps to 133.37bps).
weakened 0.36% to 74.71.
rose $1.33 to $108.44.
rose $18.1 to $1475.4.
fell 0.65pts to 16.27%.
10Y US Treasury yields
rose 3.9bps to 3.5%.
gained 0.17% to 1310.9.
Spreads were mixed in the US with IG tighter, HVOL wider, ExHVOL better,
and HY rallying. IG trades 3.5bps wide (cheap) to its 50d moving
average, which is a Z-Score of 1.1s.d.. At 94.52bps, IG has closed
tighter on 141 days in the last 589 trading days (JAN09). The last five
days have seen IG flat to its 50d moving average. HY trades 17.7bps wide
(cheap) to its 50d moving average, which is a Z-Score of 1.1s.d. and at
442.74bps, HY has closed tighter on 60 days in the last 589 trading
Indices generally outperformed intrinsics with skews mostly narrower.
Comparing the relative HY and IG moves to their 50-day rolling beta, we
see that HY outperformed by around 0.4bps. Interestingly, based on
short-run empirical betas between IG, HY, and the S&P, stocks
underperformed HY by an equivalent 1bps, and stocks underperformed IG by
an equivalent 0.1bps - (implying IG outperformed HY (on an
Among the HY names in the US
, the worst performing names (on a DV01-adjusted basis) were PMI Group
Inc/The (+64.47bps) [+0.53bps], Radian Group Inc (+39.74bps) [+0.36bps],
and Eastman Kodak Co. (+34.52bps) [+0.28bps], and the best performing
names were Energy Future Holdings Corp. (-108.34bps) [-0.73bps],
Supervalu Inc. (-52.84bps) [-0.49bps], and Alcatel-Lucent USA Inc.
(-15bps) [-0.15bps] // (absolute spread chg) [HY index impact].
Among the IG names in the US
, the worst performing names (on a DV01-adjusted basis) were SLM Corp
(+6.96bps) [+0.05bps], Expedia, Inc. (+3.79bps) [+0.03bps], and RR
Donnelley & Sons Company (+3.71bps) [+0.03bps], and the best
performing names were CA, Inc. (-1.5bps) [-0.01bps], Sara Lee Corp.
(-1.02bps) [-0.01bps], and General Mills Inc. (-0.75bps) [-0.01bps] //
(absolute spread chg) [HY index impact].