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Capital Context Update: Vigilance Vindicated Via Veritable Volume Vacuum
From Capital Context
S&P futures managed to creep up to the pre-USA outlook change lows of early yesterday amid the lowest volume day in over two weeks and while HY and IG credit also managed gains on the day, we note some interesting shifts under the surface that should be considered less sanguine. Stocks bucked a recent trend by outperforming credit on the day but the headline 'risk-on' is not appropriate given the relative underperformance of HY credit to IG, considerable flattening in 3s5s curves, and continued up-in-quality theme playing out in credit-land.
S&P futures managed to creep back to pre-announcement levels from
yesterday morning but volume was incredibly light and unconvincing.
Goldman's earnings (for whatever they are worth given the total opacity of any bank's balance sheet) seemed to disappoint the equity crowd and the better-informed also noticed (as we pointed out to you in the
Midday Movers
) that CDS were compressing modestly in the face of this equity weakness.
While this seems slightly odd at first glance, we note two things: 1) 3Y CDS notably underperformed in most of the US and European financials today - suggesting a derisking in closer maturities and perhaps growing concerns over the ability to roll their debt (TLGP included) without impacting earnings; and 2) relative underperformance of financials fundamentals suggests less ability to be 'shareholder-friendly' via dividends/buybacks (even though GS obviously did both) and perhaps that is relatively improving the credit outlook. Either way, there was little positive to take away and while EU financials did better on a quiet day across the pond, they remain at extremely wide levels relative to any new normal.
This afternoon saw a slow grind up to that pre-rating outlook change level - which seemed inevitable (as is clear in the upper chart) but remained notably below the best levels pre-announcement.
Investment grade credit
(IG) however did manage to fill the gap and traded to yesterday's tightest levels at 94.5bps bid - but held at those levels for much of the afternoon.
High yield credit
(HY) was a different picture as it never managed to quite fill the gap from yesterday's move (around $102.375 or 441bps) making it to $102.325 (443bps) today before actually selling off a little into the close, ending at around $102.175 (447bps -3bps on the day). For much of the day we also saw 3Y HY actually wider close-to-close which was against its fair-value move (slightly tighter) again showing that 3s5s flattening that we have been keeping an eye on (note that 3s5s in HY index is 143bps and 3s5s intrinsics is 120bps for an idea of the flow into that trade that has yet to push back into the underlying single-names). Compare that 'skew' to XOver (high yield EUR credits) which are 100bps and 102bps for the index and intrinsics and you see clearly where liquidity is the potential for single-names to decompress at the short-end (as idiosyncratic fundamentals start to become important again). HY remains (aside from yesterday) at its wides of April while IG is back within the range quite easily.
This HY underperformance and 3s5s flattening was evident in the cash markets today. Secondary bond trading saw HY bonds net sold and IG bonds net bought quite aggressively. Some points of interest in this mumbo jumbo were the focus on low-quality IG names (BBB+ to BBB-) as the center of attraction for buyers, a focus on selling the 1-3Y bonds and buying 7-12 and 12+ maturities, and a modest flattening in the TSY curve (again notable given equity's strength). So it would appear that corporate bond players were willing to extend duration in quality names to grab some yield as they withdrew from riskier names - an interesting action given recent fund flows and once again bear in mind the ongoing macro overlay-to-idiosyncratic unwind positioning that we feel is happening under the covers.
10Y Treasury rallied today along with S&P futures even as the USD lost ground against most majors - seems like the arb compression drove it?
As far as the
TSY complex
today goes, three things stand out: 1) they rallied along with stocks (even as DXY fell notably); 2) 2s10s30s re-synced perfectly with S&P futures confirming our view that it is the carryt trade du semaine; and 3) perhaps most notably, 10Y TSY yields converged handsomely back to their relationship with S&P futures. The latter point we discussed yesterday as a possible arb and was pointed out by our friends at
Zerohedge
providing a handsome $6400 profit (delta-hedged) for a $1mm notional 10Y TSY position. These relationships within and across asset classes are critical in the context of juding investment positions and we hope some of this is useful in vindicating our vigilance (as the wonderful post title would suggest).
In
vol land
, we continue to consider the selling short-dated vol and buying long-dated OTM vol the trade-du-jour but grossly crowded given the incredible skews and term structure moves we have pointed out to you for a few weeks now. These pennies-in-front-of-steamroller trades are great carry generators until you lose an arm and with single-name vols tending to leak higher among the lower quality names (as we have been pointing out recently), we suspect the short implied correlation trade is a little less risky here (if possible for investors). VIX ended the day sub 16% but still above Friday's closing level (and intraday lows) and we note that the 1m to 3m vol term structure steepened back towards Friday's steeps again today. Skews remain elevated and implied correlation was very flat today.
Contextually
, a healthy 46% of all names we track agreed in credit and equity improvement today (and 6% agreed on deterioration). Divergences were well balanced with 24% in each (debt up, equity down and vice versa). Sectors were mostly in agreement on aggregate that things improved but we note Media saw credit compression and equity losses today on average while Tech saw the opposite with credit decompression and equity gains.
Basic Materials and Healthcare saw equity outperforming the most over credit (on a beta-adjusted basis) while Financials, Media, and Utilities saw credit benefitting the most today. The picture was slightly mixed across quality cohorts with equity seemingly underperforming at the very best and very worst levels (financials and HY?) and therre was little systemic theme within and across single-name vol today.
Some names to keep an eye on include Omnicom, DTE Energy, MGM Resorts, and Altria (all of which saw notable credit outperformance relative to equities today) and at the other end of the scale (credit decompression and equity improvement) we notice Dynegy, Hovnanian, Dover Corp, Praxair, and Pride International.
Bottom Line
for us is that not much has changed today - some relationships have been dragged back into line and so tomorrow we may see some more realistic action in equities and Treasuries but credit certainly was not buying back into the positivity en masse today and the risk-on charge back into higher beta assets does not seem as hot and heavy as it has been on these dips in the past.
Europe
All was quiet on the Eastern front (well East of me anyway) as we seemed to take a pause in the frantic selling/unwinding today. European investment grade non-financials managed to stabilize (though no real compression) as financials rallied modestly (on the back of some let up in spread decompression for sovereigns). Main and XOver did see 3s5s flattening also (similarly somewhat negative to US IG and HY).
The sovereign moves today looked a lot like index arb against SovX as we had got quite a way ahead of the index based on the underlying components and similarly CEEMEA sovereigns are trading notably tighter than the index on an individual basis (perhaps more compression is due in CEEMEA - though there is the oil-factor to mix into that little quandary).
All-in-all relatively quiet but we do note that high beta credits underperformed low beta credits today - perhaps indicative of the same up-in-quality shift we are seeing in the US.
Asia
Dollar Strength is positive in this chart and it is evident that Asian FX has seen the largest outperformance relative to the Majors and Trade-Weighted index. Gold and Silver continue to surge.
Most of the Australian and Asian credits caught the flu from the European and US snafu's yesterday and were almost all wider. Asian banks underperformed non-financials thorughout but in AUS we saw modest outperformance by their banks (though both widened on the day). Asia ex-Japan managed to creep 2bps tighter in US and European hours (recouping around half of yesterday's losses) but ITRX Japan contonued its slow leak wider as did Australia.
As an interesting aside, the USD has lost most ground relative to the Asian currencies this week but clearly (from the chart opposite), the largest benefactors of a concern regarding USD has been gold and even more so silver as it broke $44 today (and gold stalled just below $1500). While the dollar is actually up on the week, we note the very considerable drop post USA-outlook-change and the considerably higher beta moves in Silver versus Gold.
Index/Intrinsics Changes
CDX16 IG
-1.16bps to 94.59 ($0.05 to $100.2) (FV -1.01bps to 93.23) (14 wider - 92 tighter <> 67 steeper - 54 flatter) - No Trend.
CDX16 HVOL
-0.1bps to 156 (FV -1.73bps to 152.73) (3 wider - 25 tighter <> 21 steeper - 8 flatter) - No Trend.
CDX16 ExHVOL
-1.49bps to 75.2 (FV -0.78bps to 75.15) (12 wider - 84 tighter <> 50 steeper - 46 flatter).
CDX16 HY
(30% recovery) Px $+0.19 to $102.185 / -4.5bps to 446.2 (FV -6.44bps to 432.54) (15 wider - 82 tighter <> 61 steeper - 37 flatter) - No Trend.
LCDX15
(70% recovery) Px $+0.61 to $101.375 / -15.45bps to 237.61 - Trend Wider.
MCDX15
-4.79bps to 148.21bps. - No Trend.
ITRX15 Main
-1.09bps to 100.66bps (FV-1.44bps to 102.67bps).
ITRX15 HiVol
-0.47bps to 139.53bps (FV-1.84bps to 137.14bps).
ITRX15 Xover
-8.62bps to 373.38bps (FV-2.88bps to 365.71bps).
ITRX15 FINLs
-5.28bps to 133.47bps (FV-4.68bps to 137.9bps).
DXY
weakened 0.59% to 75.06.
Oil
rose $1.03 to $108.15.
Gold
rose $0.7 to $1496.
VIX
fell 1.13pts to 15.8%.
10Y US Treasury yields
fell 1.7bps to 3.36%.
S&P500 Futures
gained 0.61% to 1309.
Spreads were tighter in the US as all the indices improved. IG trades 3.1bps wide (cheap) to its 50d moving average, which is a Z-Score of 1s.d.. At 94.59bps, IG has closed tighter on 142 days in the last 592 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. HY trades 18.3bps wide (cheap) to its 50d moving average, which is a Z-Score of 1.2s.d. and at 446.75bps, HY has closed tighter on 68 days in the last 592 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 2.2bps. Interestingly, based on short-run empirical betas between IG, HY, and the S&P, stocks outperformed HY by an equivalent 6.7bps, and stocks outperformed IG by an equivalent 1.2bps - (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 News America Inc (+2.33bps) [+0.02bps], Black & Decker Corporation (+1.5bps) [+0.01bps], and General Mills Inc. (+1bps) [+0.01bps], and the best performing names were MDC Holdings Inc (-5.67bps) [-0.04bps], Toll Brothers, Inc. (-4.42bps) [-0.03bps], and Altria Group Inc (-3.73bps) [-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 Iron Mountain Incorporated (+9.86bps) [+0.1bps], Dillard's, Inc. (+6.75bps) [+0.07bps], and DISH DBS Corporation (+4.8bps) [+0.05bps], and the best performing names were MBIA Insurance Corporation (-80.39bps) [-0.54bps], Community Health Systems Inc (-36.7bps) [-0.35bps], and Parker Drilling Co. (-31.67bps) [-0.33bps] // (absolute spread chg) [HY index impact].
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Great and Timely Info! Thank you very much, Capital Context! Looking forward for your articles.
Thank you so much for such a valuable and insightful piece. I do hope that you continue to write these notes on this forum.
I also hope that, one day, I will understand every single word you say but your writing style is both explanatory and succinct, making the task of learning about bonds that much easier.
I sincerely appreciate it.
__________
However, to be as nit-picky as you can possibly imagine, I believe the term should be de la semaine, not du semaine.
Ha!
Awesome information. Thanks again!
more like "fin de siecle." Interestingly "the Russians call it the Silver Age." We shall see "if you are right--or just plain stupid."
Tnx Orly - I did a few years of French at school - shoulda known better!!! We are planning on an 'explainer' piece shortly that should help explain some of the jargon we use and also how to make use of the insights. Appreciate the feedback.
Actually, the jargon I am used to, as it is ubiquitous on this fantastic site.
Some very basic stuff behind the jargon would be helpful for bond noobs like myself. I prefer 4X but knowing how bonds work would, obviously, be very helpful. I'm trying to really get it down now while fundamentals don't matter so much- until they do. I would like to be prepared for that event!
For instance, I realise that 3s5s10s would indicate a yield. Others are written 3m5m10m (?) and I can see it is a curve but what is the difference? Stuff like that...
________
Sincerely, I don't mean to be a grammar cop. I was only kidding about that, as many commenters here would as soon criticise others' spelling rather than try to understand their ideas.
:D
Gulp. Get the drink ready. Heck just freeze me and wake me after 100 years.
Technicals shmecticals.......just keep an eye on the bouncing bald head.
http://www.bloomberg.com/news/2011-04-19/bernanke-may-reinvest-maturing-debt-to-avoid-cold-turkey-end-to-stimulus.html