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Capital Context Update: Quedit Quite Quiet
From Capital Context
Relative spread performance in CDS-land was mixed today but moves were very small in general.
Stocks handily outperformed credit today as primary issuance in corporate bond land seemed to dominate everyone's attention. Low beta credit outperformed high beta in general though moves were small and judging from TRACE data both secondary bonds and CDS saw more up-in-quality as HY underperformed once again (though managing a 3bps compression in the index).
Across our broadest universe of CDS names, spreads compressed very modestly but it was the incredibly low level of moves in general that was most notable as only 1.8% of all names (>450 active quoted names today) moved by more (in absolute terms) than the average for the index. EK and MBI managed decent gains as SPLS, ODP, SRAC, Energy Futures Holdings (ex TXU), and AMR saw relatively large losses (widening) but realistically (when adjusted for relative DV01s) these were the only significant movers in credit in general.
Breadth was positive at around three-to-two tighteners to wideners but across the spread bucket cohorts we see very few managing moves equivalent to 2bps of compression or decompression today (trying to keep the moves comparable across the spread spectrum).
Sector moves were mixed in credit
but were all one way in credit-relative-to-equity when we adjust for context -
equity outperformed
.
Consumer Cyclicals modestly underperformed (mostly hurt by SPLS, ODP, and SRAC as we said above) while EK's compression (on patent resolution) was the main driver of Technology's outperformance. Finance was helped mostly by monolines and consumer finance names as Banks in general actually widened today.
We also saw some
interesting vol moves
with front-end VIX dropping significantly and the vol term-structure steepening while implied correlation remained relatively high. VIX futures rolled and likely had some impact and of course OPEX on Friday always seems todrag the front-end down but we did notice a slight shift in the capital structure context. High beta names saw vol drop verymodestly while low beta names saw vol rise a little - this is the same pattern as recent days (i.e. low beta protection more bid) but the fact that the higher-beta vols actually dropped in aggregate was new. We noted yesterday (and hattip to AndrewY for confirming this recently) that
single-name vols had been rising recently out of context with CDS and perhaps today we saw the start of some more concerted compression in that trade (sell vol, buy protection or a variant of that - and this might help explain why single-name CDS underperformed on average relative to the indices today
).
Low quality credits in general saw their stocks significantly underperform in today's stock market rally.
Single-names underperformed indices today
. The fair-value of pretty much every index we track in credit land underperformed the index movements today. This goes back to some of our recent comments regarding investors shifting away from systemic overlays and taking/reducing exposures in corporate credit on a more idiosyncratic basis. There was also further flattening in 3s5s curves today with 3Y intrinsics actually wider in many cases. It was perhaps not unexpected that we saw some compression in HY today following five days in a row of decompression (just eyeballing our histories, it is very seldom that we see a run of more than five days in a row of decompression).
The general lack of ethusiasm in credit today exaggerated equity trends and we saw a very notable underperformance of equities relative to credit in the lowest quality names. Sectors, as we mentioned, were all in favor of equities (on a beta-adjusted basis) with Energy and Basic Materials outperforming in equities the most relative to our credit expectations. Consumer Noncyclicals and Financials were the most in sync at the other end of the spectrum.
A few names that stood out today were ODP and SPLS (on the latter's weak results) - notably ODP's debt and equity were relatively in sync in these moves today while SPLS massively underperformed in equity relative to credit - seems like some releveraging premium being sucked out of that. Our vol comments above were evident in EP and FST which saw spread decompression and decent vol compression today.
SovX and FINLs were wider today in
Europe
as Main ex-FINLs managed a modest compression of spreads - this is in line with what we have discussed that FINLs should decompress further relative to non-financials given the level of sovereign risk priced into the market. Basis traders were active again in Greece as the GGBs handily outperformed CDS on the day.
At the single-name level in Europe, banks and PIG utilities were worst performers but the best performers had no real theme except they were pretty much all the tightest spread names. Once again this fits with the recent theme of rising dispersion that we have seen over in the US.
Carry funders appear to have reverted back to the JPY. Will risk-on drive another virtuous leg weaker in USD?
On a
quick macro note
, we have seen more and more performance in the risk assets being driven by ticks in the USD. Today DXY was close to unch from last night's equity close but drifted higher from the early hours but what is most notable is the divergence between the JPY and the rest of the majors to the USD. We discussed a week or two back we suspected the shift back from the USD to the JPY as the carry funding currency (basing that call on the resyncing between trade-weighted JPY strength and risk-off (based on Gold / non-PM commodities) after a significant disconnect for the previous few months as seen in the above chart.
This perhaps reflects on the fact that we are nearing the end of QE2 and carry funders see volatility in there. This would suggest USD strength but given the resyncing of silver and gold with DXY this week, the ongoing stress in Europe re-appearing (not helped by DSK's vol-inducing moves), may mean we have seen the 'correection' in the USD that some were looking for. The forward DXY curve is certainly more upward-sloping that in recent weeks at comparative levels suggesting expectations of USD strength and given that the pain trade is weaker USD (and don't forget the potential impact of basis traders hedging their sovereign positions in Europe and also with Syrian assets being frozen maybe more 'nasty-people' will be withdrawing their US assets and hiding in caves).
It seems the next leg of USD weakness will be virtuously supported by a risk-on revival as JPY crosses accelerate but for now today's TSY weakness and USD strength vs JPY didn't seem to stumble the machines as it looks to us like 2s10s30s has become the new juice for S&P futures correlations (tick for tick this week!).
Bottom line
is that the plethora of issuance seemed to distract many in the credit space as equity rallied and credit ignored it (once again). We are hearing more and more about funds flipping these new issues as concessions remain comfortable (e.g. NSC's 100Y craziness appeared to us 100-125bps cheap to a CDS-implied valuation and remember that its duration is only around 17years but still 100Y!!). Most of the recent themes continued in credit and also in stock performance - though obviously we didnt expect equities to outperform today by so much (note this was the largest single-day equity outperformance of HY since 3/21 on a beta-adjusted basis) - so maybe worth considering some debt-equity compression - though our ETF Arb is not signaling.
Index/Intrinsics Changes
CDX16 IG
-1.5bps to 88.75 ($0.06 to $100.42) (FV -0.66bps to 88.86) (20 wider - 95 tighter <> 72 steeper - 52 flatter) - No Trend.
CDX16 HVOL
-1bps to 148.8 (FV -0.98bps to 148.87) (5 wider - 23 tighter <> 17 steeper - 13 flatter) - No Trend.
CDX16 ExHVOL
-1.66bps to 69.79 (FV -0.54bps to 70.62) (16 wider - 80 tighter <> 41 steeper - 55 flatter).
CDX16 HY
(30% recovery) Px $+0.12 to $102.5 / -3bps to 438.7 (FV -1.44bps to 428.99) (43 wider - 50 tighter <> 64 steeper - 33 flatter) - Trend Wider.
LCDX16
(70% recovery) Px $+0.05 to $101.375 / -1.14bps to 248.86 - Trend Wider.
MCDX16
-2.38bps to 121.625bps. - No Trend.
ITRX15 Main
-0.25bps to 97.75bps (FV+0.75bps to 100.83bps).
ITRX15 HiVol
+0.31bps to 133.31bps (FV+1.28bps to 133.87bps).
ITRX15 Xover
-0.92bps to 357.08bps (FV+5.11bps to 349.53bps).
ITRX15 FINLs
+0.62bps to 140.25bps (FV+1.2bps to 138.72bps).
DXY
strengthened 0.02% to 75.41.
Oil
rose $2.89 to $99.8.
Gold
rose $10.25 to $1497.05.
VIX
fell 1.32pts to 16.23%.
10Y US Treasury yields
rose 6.4bps to 3.18%.
S&P500 Futures
gained 1.1% to 1340.
Spreads were tighter in the US as all the indices improved. IG trades 3.4bps tight (rich) to its 50d moving average, which is a Z-Score of -1.4s.d.. At 88.75bps, IG has closed tighter on only 33 days in the last 612 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. HY trades 9.2bps wide (cheap) to its 50d moving average, which is a Z-Score of 0.4s.d. and at 438.74bps, HY has closed tighter on 69 days in the last 612 trading days (JAN09). Indices generally outperformed intrinsics 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 1.3bps. Interestingly, based on short-run empirical betas between IG, HY, and the S&P, stocks outperformed HY by an equivalent 14.3bps, and stocks outperformed IG by an equivalent 2.2bps - (implying IG underperformed HY (on an equity-adjusted basis)).
Among the IG names in the US, the worst performing names (on a DV01-adjusted basis) were Whirlpool Corp. (+1.98bps) [+0.02bps], Time Warner Inc. (+1.57bps) [+0.01bps], and TJX Companies, Inc./The (+1.11bps) [+0.01bps], and the best performing names were Dell Inc. (-6.75bps) [-0.05bps], RR Donnelley & Sons Company (-6.8bps) [-0.05bps], and CenturyLink, Inc. (-3.63bps) [-0.03bps] // (absolute spread chg) [HY index impact].
Among the HY names in the US, the worst performing names (on a DV01-adjusted basis) were Energy Future Holdings Corp. (+57.7bps) [+0.38bps], EL Paso Corp (+9.61bps) [+0.1bps], and Tesoro Corporation (+9.17bps) [+0.1bps], and the best performing names were Eastman Kodak Co. (-143.53bps) [-1.11bps], MBIA Insurance Corporation (-60.84bps) [-0.42bps], and First Data Corp (-22.25bps) [-0.21bps] // (absolute spread chg) [HY index impact].
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"Carry funders appear to have reverted back to the JPY. Will risk-on drive another virtuous leg weaker in USD?"
It is difficult to see how this would be possible given the fact that the Fed has openly admitted buying yen on the market. Also, given Japan's economic situation, it would seem that a bet on yen strength would be rather treacherous at this juncture.
But, then again, up is down and down is up in the quazy, quazy woild.
:D
What does that mean?
What does that mean?
What does that mean?
What does that mean?