Daily Credit Summary: April 12 - Navel Gazing

Commentary compliments of www.creditresearch.com

Spreads rallied today after positive headlines in Europe and some spread-compressing single-name M&A activity in the US. HY14 closed at its best since inception, below 500bps, as IG closed only at last Tuesday's levels but notably IG outperformed intrinsics and HY underperformed intrinsics suggesting some possible HY-IG decompression was at play.

All-in-all, given the supposed clarification that we got from Europe, today's performance was notably dull with idiosyncratic moves dominating any systemic strength (which is not what many expected). Spreads opened tighter following last night's Greece news (see yesterday's note for our perspective) but it was clear that while the rally in EUR, compression in front-end bonds, and gap in 5Y CDS was exactly what we expected, much as we also expected, these improvements were less than many thought and did not last. 5Y CDS gapped 50bps or so tighter (back only to last Tuesday's levels) and even short-end bonds only managed 100bps compression and around 43bps in GGBs over Bunds (as we pointed out this was not unexpected and does nothing to solve longer-term instability).

Critically, the rest of the PIIGS were largely unmoved (small tightening) with Spain the least improving as Greece's move accounted for more than half of SovX's 2.75bps compression. Whether it was Merkel's about-face or simply relative strength, Bunds underperformed today (5Y +2bps) and the EUR was well off its best levels by the close of EUR (and did nothing to improve on that into the US day). EURJPY came back off its best levels into the EUR close and then went almost perfectly sideways for the rest of the day (providing little lift to stocks in the US).

ITRX FINLs outperformed SovX today while SUBs actually hung in with SENs most of the way. ITRX FINLs managed to get back under 15bps cheap to ExFINLs for the first time in over a week but ExFINLs remains wider over the last week. Somewhat oddly (perhaps unrelated), MCDX managed to rally notably today (-12bps to 123bps) - perhaps some SovX-MCDX style trades out there.

Late in the afternoon, we noted a chunky volume go through in S&P futures pushing it to the downside at the same time as IG saw a 0.5bps compression (and a jump in HY14 prices). There has been a lot of talk about debt-equity divergence recently (see tomorrow's FT for some of our comments that we have shared with you before) and we wonder if a top-down CSA trade was put in place - we'll never know.

High beta credits outperformed low beta (in IG and HY) and we note that there was definitely a reach-for-yield theme in single-names today as BB and below outperformed. A new index we created on the Top 100 CDO reference entities improved today with modest 3s5s flattening as only 9 names widened against 80 that tightened in that group. This, along with IG9 underperformance, suggests some index arb and correlation desk activity at play in these higher vol/wide spread names. An interesting piece by GS on buying CDO-referenced names relative to IG caught our attention (based on client requests) and while we have not completed the analysis, we would caution an initial run at this based on IG skews, historical IG14 intrinsics (not an on-the-run index beta), dispersion, and curve shape changes - more on this later in the week.

We discuss some of the specific movers below but we do note that among the largest movers were a majority of IG9/HY14 tail names, ex-LBO names, and very cyclical companies (all HY names such as retailing (SKS and RAD), Airlines, Consumer Finance, and homebuilders). Someone clearly wanted some high beta exposure to macro recovery (as 3s5s steepened in most cases).

VIX closed at its lowest since JUL07, as 30-day realized vol made fresh lows since DEC06 (which is actually very close to its record realized of the last ten years). 90-day realized and 3M implied vol are staying in sync (with realized vol hovering at previous vol cycle/regime 2003-2006 highs and the breakout levels in 2007). With OPEX next week, the short-term vol term structure is dramatically steep (VIX vs VXV) which has tended to imply notable jumps in short-term vol in the past but the compression in realized vol is what we hear as a nagging doubt from most clients.

Movers in the US today
Independent Power Producers have been volatile recently in CDS markets and today saw Reliant and Mirant merge. This merger of unequal credits (the best phrase we heard was two drunks holding each other up) was the driver of considerable compression in their spreads and implicitly HY14 (which contains both). Mirant compressed massively to around 235bps but RRI rallying only 147bps, closed wide of where Mirant closed on Friday still. Both stocks rallied healthily (despite being an all stock deal with no new cash). Somewhat interesting the longer-end of the curve for these two names steepened (from a considerable inversion) but remains inverted in both in 5s10s as 3s5s fell notably.

RRI and MIR were responsible for just under half of the overall compression today in HY14 (around 6bps) and along with the yieldier homebuilders (SPF, HOV, and BZH) which saw decent 3s5s flattening (with 5Y compressing very nicely even as delinquencies reached record highs), was responsible for most of HY14's performance today. RESCAP managed to sell some assets off and saw its 5Y rally over 50bps to 488bps.

ENRG names were the worst performers in IG today with CEG and Kinder Morgan leading the laggards (one wonders if the all-stock RRI-MIR deal puts a ceiling on valuations and perhaps shows there is little interest in any deals here for outside money). The Utility curves also steepened in 3s5s and 5s10s. In the broad universe, other Utilities underperformed including Exelon, Entergy, Allegheny, and Centerpoint along with several Energy Services firms such as Noble Energy and Cameron Intnl.

FINLs outperformed with more 3s5s flattening as across IG names we saw more 3s5s flattening than steepening. Commercial and residential delinquencies at records (rising still) along with chatter over bank loan losses being way below where the should be (especially if/when the HELOCs start to be given up) but still CMBX, ABX, builder, and financials outperform. CONSumer credits performed admirably followed by INDUstrials (but INDUs saw 5s10s steepening). Alcoa leaked wider after the close on a revenue miss and marginal EPS beat. Airlines also outperformed today.

Lubrizol was the laggard today (another popular LBO screen name) along with EK, MNI, and LIZ (which have all been seen on screens recently) but Lubrizol was the worst (with significant 3s5s steepening also).

Thanks to those clients who wished me well for the hip surgery that I have tomorrow (no EOD summary, sorry, since a drug-fueled rant will do no-one any good.) To those clients who did not wish me well, snubbed (back on Wednesday).

Index/Intrinsics Changes
CDR LQD 50 NAIG -1.23bps to 78.02 (6 wider - 39 tighter <> 26 steeper - 22 flatter).

CDX14 IG -1.37bps to 84.13 ($0.07 to $100.71) (FV -0.89bps to 90.35) (22 wider - 80 tighter <> 64 steeper - 57 flatter) - No Trend.

CDX14 HVOL -2bps to 136 (FV -2.05bps to 135.15) (1 wider - 27 tighter <> 16 steeper - 13 flatter) - No Trend.

CDX14 ExHVOL -1.17bps to 67.75 (FV -0.52bps to 76.37) (21 wider - 74 tighter <> 47 steeper - 48 flatter).

CDX14 HY (30% recovery) Px $+0.4 to $100.03 / -10.2bps to 499.2 (FV -14.82bps to 477.48) (14 wider - 80 tighter <> 69 steeper - 29 flatter) - Trend Tighter.

LCDX14 (70% recovery) Px $+0.31 to $99.31 / -8.3bps to 268.22 - Trend Tighter.

MCDX14 -12bps to 123bps. - Trend Tighter.

CDR Counterparty Risk Index fell 2.69bps (-2.71%) to 96.39bps (1 wider - 13 tighter).

CDR Government Risk Index fell 1.62bps (-2.21%) to 71.46bps..

DXY weakened 0.67% to 80.55.

Oil fell $0.63 to $84.29.

Gold fell $5.55 to $1156.45.

VIX fell 0.56pts to 15.58%.

10Y US Treasury yields fell 4.2bps to 3.84%.

S&P500 Futures lost 0.03% to 1192.3.

Market Summary
Spreads were tighter in the US as all the indices improved. IG trades 9.5bps tight (rich) to its 50d moving average, which is a Z-Score of -1.2s.d.. At 84.13bps, IG has closed tighter on only 8 days in the last 330 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. Indices typically underperformed single-names with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL underperformed but widened the skew, ExHVOL outperformed pushing the skew wider, HY's skew widened as it underperformed.

3.2% of names in IG moved more than their historical vol would imply as higher vol names underperformed lower vol names by -0.89% to -1.5%. IG's vol is around 4.38% per 1 day period, which leaves 95 names higher vol and 30 lower vol than the index.

The names having the largest impact on IG are UnitedHealth Group Inc (-8bps) pushing IG 0.06bps tighter, and Constellation Energy Group Inc. (+5bps) adding 0.04bps to IG. HVOL is more sensitive with General Electric Capital Corp pushing it 0.19bps tighter, and Alcoa Inc. contributing 0.03bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both UnitedHealth Group Inc (-8bps) pushing the index 0.08bps tighter, and Constellation Energy Group Inc. (+5bps) adding 0.05bps to ExHVOL.

Dispersion fell -0.3bps in IG. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.

Only 12% of IG credits are shifting by more than 3bps and 32% of the CDX universe are also shifting significantly (more than the 5 day average of 28%). In IG, tighteners outpaced wideners by around 4-to-1, with 22 credits wider. By sector, CONS saw 8% names wider, ENRGs 53% names wider, FINLs 5% names wider, INDUs 22% names wider, and TMTs 13% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG exFINLs) with the former trading at 74.83bps and the latter at 84.64bps.

Cross Market, we are seeing the HY-XOver spread compressing to 90.2bps from 90.41bps, but remains below the short-term average of 96.93bps, with the HY/XOver ratio rising to 1.22x, below its 5-day mean of 1.23x. The IG-Main spread decompressed to 6.63bps from 6.25bps, and remains above the short-term average of 6.52bps, with the IG/Main ratio rising to 1.09x, above its 5-day mean of 1.08x. Among the HY names, we see higher risk names (>500bps) outperforming lower risk (<500bps) names. In the IG names, we see higher beta names underperforming lower beta names.

In the US, non-financials underperformed financials as IG ExFINLs are tighter by 0.6bps to 84.6bps, with 64 of the 106 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 2.69bps to 96.39bps, with Brokers (worst) tighter by 1.08bps to 120.58bps, Banks (best) tighter by 2.75bps to 93.08bps, and Finance names tighter by 3.2bps to 278.99bps. Monolines are trading tighter on average by -58.99bps (2.06%) to 2386.48bps.

In IG, FINLs outperformed non-FINLs (1.89% tighter to 0.73% tighter respectively), with the former (IG FINLs) tighter by 2.4bps to 122.1bps, with 16 of the 19 names tighter. The IG CDS market (as per CDX) is 18.6bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (65.53bps), with the bond ETFs underperforming the IG CDS market by around 2.46bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 1.17bps to 74.83bps (with ITRX FINLs -trading sideways- better by 4.06 to 88.19bps) and is currently trading in the middle of the week's range at 32.04%, between 77.99 to 73.34bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading in the middle of the week's range at 25.45%, between 70.08 to 64.36bps. ExHVOL underperformed LoVOL as the differential decompressed to 1.93bps from 1.63bps, but remains below the short-term average of 2.13bps. The Main exFINLS to IG ExHVOL differential decompressed to 7.08bps from 7.08bps, but remains above the short-term average of 6.61bps.

The Emerging Market index is 0.3% less risky (0.6bps tighter) to 213.4bps. EM (No Trend) is currently trading at the wides of the week's range at 77.87%, between 215 to 207.7bps. The HY-EM spread compressed to 285.82bps from 295.45bps, but remains below the short-term average of 306bps, with the HY/EM ratio falling to 2.34x, below its 5-day mean of 2.44x.

Single-Name Movers

Today's biggest absolute movers in IG were Constellation Energy Group Inc. (+5bps), Eastman Chemical Company (+2.25bps), and National Rural Utilities Cooperative Finance Corporation (+2bps) in the wideners, and UnitedHealth Group Inc (-8bps), General Electric Capital Corp (-5.75bps), and SLM Corp (-5.25bps) in the tighteners. Today's biggest percentage movers in IG were Sherwin-Williams Company/The (+3.67%), XTO Energy Inc (+3.64%), and Constellation Energy Group Inc. (+3.24%) in the wideners, and ConocoPhillips (-8.6%), Ingersoll-Rand Company (-5.94%), and Capital One Bank (-5.84%) in the tighteners.

In the names of the HY index, today's biggest percentage movers were Eastman Kodak Co. (+1.93%), Liz Claiborne Inc. (+1.17%), and Constellation Brands, Inc. (+0.81%) in the wideners, and Mirant North America LLC (-62.5%), RRI Energy, Inc. (-17.71%), and Standard-Pacific Corp (-12.45%) in the tighteners. The largest absolute movers in HY were Eastman Kodak Co. (+14.09bps), Liz Claiborne Inc. (+7.23bps), and McClatchy Co./The (+6.77bps) in the wideners, and Mirant North America LLC (-400bps), RRI Energy, Inc. (-147.44bps), and K Hovnanian Enterprises, Inc. (-70.19bps) in the tighteners.

The CDR Counterparty Risk Index Series 2 (of brokers and banks) fell -2.69bps (or -2.71%) to 96.39bps. JP Morgan Chase & Co. (0.5bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst JP Morgan Chase & Co. (0.83%) is the worst (relative) performer. Deutsche Bank AG (-5bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and Deutsche Bank AG (-5.59%) is the best (relative) performer.

The CDR Aussie Index fell -2.99bps (or -4.19%) to 68.44bps. SingTel Optus Pty Ltd (-0.95bps) is the worst (absolute) performer, whilst Westfield Trust (-1.83%) is the worst (relative) performer. Woodside Petroleum Limited (-6.29bps) is the best (absolute) performer, and Woodside Petroleum Limited (-7.19%) is the best (relative) performer.

The CDR Asian Index fell -1.87bps (or -2.23%) to 81.7bps. Tenaga Nasional Berhad (1.21bps) is the worst (absolute) performer, whilst Tenaga Nasional Berhad (1.62%) is the worst (relative) performer. Acom Co Ltd (-10bps) is the best (absolute) performer, and POSCO (-7.79%) is the best (relative) performer.

Comments

[lawton]

PERSONAL INCOME DROPS 3.2% SINCE OBAMA... DEVELOPING... Drudge Report

[bugs_]

I didn't skip over this.  Its a lot of material.

I learned there is something called "chunky" volume.

[non-anon]

I thought this was a great piece on Mish's Global Blog. A snippet,

Escape Velocity

Amazingly, Larry Summers says that problems with healthcare, education, and even long term fiscal deficits are being addressed. That is proof economists are starting to believe their own nonsense on extend and pretend.

"I think the economy appears to be moving towards escape velocity." said Summers.

One thing that has reached escape velocity is Larry Summers' imagination.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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"Banking System Still Quietly Insolvent" ; Larry Summers' Imagination Reaches Escape Velocity
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