Daily Credit Summary: April 19 - More Omphaloskepsis

Commentary by www.creditresearch.com

Spreads ended the day modestly wider, underperforming stocks from Friday's close, as despite notable swings intraday, credit markets tracked equity markets almost perfectly, ending at the day's best levels. HY outperformed IG by the close (with its higher beta to stocks) but single-name breadth in credit was very negative.

The US opened weak, gapping wider of Friday's wides in both IG and HY, but in line with equity's gap down open (and Europe's weakness in credit with FINLs underperforming SovX and dragging Mai wider). A small rally at the open in IG pulled us back to the day's tights (which notably remained above Friday's wides!) but very quickly we sold off to the day's wides (widest in IG since the first week of March (ex-roll day)). Notably the break above the recent swing wide of 90.25bps (to around 91bps offered today) seemed like decent resistance as stocks also found resistance at Friday's lows. HY followed a very similar path with slightly more positive sentiment, managing to trade tighter into Friday's range.

Market trod water for an hour or so at these levels (with dealer runs suggesting an initial flurry of two-way action followed by nothing) but somewhat amazingly, a comment from the SEC on the vote being 3-2 (along partisan lines) on the GS suit was enough to spur a healthy and fast rally back to the day's highs in stocks, new high prices in HY for the day, and near the day's tights for IG. The four-hour sell-off in spreads which took us back above 500bps in HY, and above 90bps in IG, was quickly undone in a much more gappy rally back. The rally was in all risk assets (and helped by an acceleration in JPY weakness - carry trade) but although the S&P managed to close higher on the day, IG and HY closed wider (IG underperforming HY).

Low beta marginally outperformed high beta credits with only a handful of single-names actually tighter by the close (as liquidity was almost entirely focused in the indices as the rally continued). Curves were generally steeper in indices and single-names (IG more so than HY) with no real theme among the weakness as INDustrials appeared to outperform but it was a close tie for worst between FINLs, ENRG, and CONSumers.

While we would typically have expected the trend of Monday madness (compression from Friday to Monday close is much more empirically probable since the SEP roll - actually 71% and 60% since the MAR09 wides) to continue, the size and shift in IG in the last two days, taking it back very close to its 50-day average intraday (91.25bps), is quite notable. This is the first IG widening of more than 1bps on a Monday in over 10 weeks! The bounce off the 50-day average intraday could be cause for concern (for bears) but sets up an easy sell IG protection trade (with a stop at 91.75bps) as a decent risk-reward from here (purely a trade).

Index/Intrinsics Changes

• CDR LQD 50 NAIG +2.27bps to 79.19 (45 wider - 2 tighter <> 38 steeper - 12 flatter).
• CDX14 IG +0.75bps to 88.25 ($-0.03 to $100.52) (FV +2.58bps to 90.11) (118 wider - 3 tighter <> 80 steeper - 43 flatter) - Trend Wider.
• CDX14 HVOL +5bps to 135 (FV +3.67bps to 0) (28 wider - 1 tighter <> 16 steeper - 13 flatter) - No Trend.
• CDX14 ExHVOL -0.59bps to 73.49 (FV +2.25bps to 77.08) (90 wider - 5 tighter <> 31 steeper - 64 flatter).
• CDX14 HY (30% recovery) Px $0 to $100.38 / 0bps to 490.4 (FV +12.06bps to 474.19) (91 wider - 5 tighter <> 45 steeper - 55 flatter) - No Trend.
• LCDX14 (70% recovery) Px $-0.12 to $100.38 / +3.05bps to 240.18 - Trend Tighter.
• MCDX14 +2.25bps to 122.25bps. - No Trend.
• ITRX13 Main +4.56bps to 84.31bps (FV+2.89bps to 83.03bps).
• ITRX13 XOver +18bps to 429bps (FV+16.96bps to 412.54bps).
• ITRX13 FINLs +6.32bps to 102.13bps (FV+6.53bps to 102.3bps).
• CDR Counterparty Risk Index rose 5.91bps (5.86%) to 106.8bps (13 wider - 1 tighter).
• CDR Government Risk Index rose 0.34bps (0.43%) to 78.93bps..
• DXY strengthened 0.13% to 80.93.
• Oil fell $1.43 to $81.81.
• Gold fell $1.65 to $1135.75.
• VIX fell 1.02pts to 17.34%.
• 10Y US Treasury yields rose 3.5bps to 3.8%.
• S&P500 Futures gained 0.41% to 1195.2.

Market Summary

Spreads were mixed in the US with IG worse, HVOL wider, ExHVOL better, and HY rallying. IG trades 3.5bps tight (rich) to its 50d moving average, which is a Z-Score of -0.5s.d.. At 88.25bps, IG has closed tighter on 35 days in the last 335 trading days (JAN09). The last five days have seen IG converging to its 50d moving average.

Indices generally outperformed intrinsics 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 outperformed but narrowed the skew.

16% of names in IG moved more than their historical vol would imply as higher vol names outperformed lower vol names by 2.98% to 3.46%. IG's vol is around 4.38% per 1 day period, which leaves 111 names higher vol and 14 lower vol than the index.

The names having the largest impact on IG are GATX Corporation (-2bps) pushing IG 0.02bps tighter, and SLM Corp (+15bps) adding 0.11bps to IG. HVOL is more sensitive with GATX Corporation pushing it 0.07bps tighter, and SLM Corp contributing 0.46bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Du Pont E.I. de Nemours & Co (0bps) pushing the index 0bps tighter, and National Rural Utilities Cooperative Finance Corporation (+10.25bps) adding 0.1bps to ExHVOL.

The price of investment grade credit fell 0.03% to around 100.52% of par, while the price of high yield credits rose 0.09% to around 100.47% of par. ABX market prices are lower by 0.57% of par or in absolute terms, 1.1%. Volatility (VIX) is down -1.02pts to 17.34%, with 10Y TSY selling off (yield rising) 3.7bps to 3.8% and the 2s10s curve steepened by 0.4bps, as the cost of protection on US Treasuries fell 0.15bps to 40bps. 2Y swap spreads tightened 0bps to 15.19bps, as the TED Spread widened by 0.5bps to 0.16% and Libor-OIS improved 0.1bps to 8.5bps.

The Dollar strengthened with DXY rising 0.12% to 80.918, Oil falling $1.43 to $81.81 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 1.58% today (a 1.6% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $1.65 to $1135.75 as the S&P rallies (1194.8 0.38%) outperforming IG credits (88.25bps -0.03%) while IG, which opened wider at 89.25bps, underperforms HY credits. IG13 and XOver13 are +1.75bps and +18bps respectively while ITRX13 is +4.5bps to 84.25bps.

Dispersion rose +1.7bps in IG. Broad market dispersion is less than historically expected given current spread levels, pointing to a more sanguine view of credits as investors discriminate less between names, with dispersion decreasing more than expected today indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads.

37% of IG credits are shifting by more than 3bps and 52% of the CDX universe are also shifting significantly (more than the 5 day average of 41%). The number of names wider than the index increased by 1 to 50 as the day's range fell to 2.75bps (one-week average 3.15bps), between low bid at 88.25 and high offer at 91 and higher beta credits (3.15%) underperformed lower beta credits (2.95%).

In IG, wideners outpaced tighteners by around 59-to-1, with 118 credits wider. By sector, CONS saw 97% names wider, ENRGs 88% names wider, FINLs 100% names wider, INDUs 89% names wider, and TMTs 96% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG exFINLs) with the former trading at 79.75bps and the latter at 85.01bps.

Cross Market, we are seeing the HY-XOver spread compressing to 59.14bps from 79.43bps, and remains below the short-term average of 78.42bps, with the HY/XOver ratio falling to 1.14x, below its 5-day mean of 1.19x. The IG-Main spread compressed to 4bps from 7.75bps, and remains below the short-term average of 6.51bps, with the IG/Main ratio falling to 1.05x, below 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 outperforming lower beta names.

In the US, non-financials outperformed financials as IG ExFINLs are wider by 2.5bps to 85bps, with 2 of the 106 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 5.93bps to 106.82bps, with Brokers (worst) wider by 7bps to 141.33bps, Finance names (best) wider by 8bps to 267.02bps, and Banks wider by 4.96bps to 100.29bps. Monolines are trading tighter on average by -26.11bps (1.18%) to 2289.89bps.

In IG, FINLs underperformed non-FINLs (3.23% wider to 3% wider respectively), with the former (IG FINLs) wider by 3.7bps to 119.5bps, with 0 of the 19 names tighter. The IG CDS market (as per CDX) is 23.5bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (64.79bps), with the bond ETFs outperforming the IG CDS market by around 1.43bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 4.01bps to 79.75bps (with ITRX FINLs -trending wider- weaker by 6.44 to 102.25bps) and is currently trading at the wides of the week's range at 100%, between 79.75 to 72.65bps, and is trending wider. Main LoVOL (trend wider) is currently trading at the wides of the week's range at 100.06%, between 71.93 to 64.62bps. ExHVOL outperformed LoVOL as the differential compressed to 0.61bps from 6.17bps, and remains below the short-term average of 2.85bps. The Main exFINLS to IG ExHVOL differential decompressed to 7.21bps from 1.66bps, and remains above the short-term average of 5.25bps.

The Emerging Market index is 0.5% riskier (1bps wider) to 210bps. EM (No Trend) is currently trading at the wides of the week's range at 76.86%, between 212.8 to 200.9bps. The HY-EM spread compressed to 278.09bps from 281.43bps, but remains above the short-term average of 277.49bps, with the HY/EM ratio falling to 2.32x, below its 5-day mean of 2.33x.

Single-Name Movers
Today's biggest absolute movers in IG were SLM Corp (+12.5bps), National Rural Utilities Cooperative Finance Corporation (+10.25bps), and Universal Health Services Inc (+10bps) in the wideners, and GATX Corporation (-2bps), Ryder System Inc. (-1bps), and Kraft Foods Inc. (-0.25bps) in the tighteners. Today's biggest percentage movers in IG were Boston Properties L.P. (+8.25%), CSX Corporation (+7.77%), and Baxter International Inc. (+7.59%) in the wideners, and GATX Corporation (-1.23%), Ryder System Inc. (-0.73%), and Kraft Foods Inc. (-0.5%) in the tighteners.

In the more financial-heavy CDR NAIG LQD 50 index, sentiment is very bearish with 42 wider to 3 tighter, and 38 steeper to 11 flatter as 1 of the 50 credits have inverted curves. The biggest absolute movers were Bank of America Corp. (+8.75bps), Morgan Stanley (+8.25bps), and Capital One Financial Corp. (+8bps) in the wideners, and GATX Corporation (-2bps), Wells Fargo & Company (-1.25bps), and Ryder System Inc. (-1bps) in the tighteners. The biggest percentage movers in the CDR NAIG LQD 50 were Capital One Financial Corp. (+8.25%), Bank of America Corp. (+7.66%), and Morgan Stanley (+6.06%) in the wideners, and Wells Fargo & Company (-1.47%), GATX Corporation (-1.23%), and Ryder System Inc. (-0.73%) in the tighteners.

In Main, the biggest percentage movers were UBS AG (+20.37%), Banco Bilbao Vizcaya Argentaria SA (+13.65%), and Banco Espirito Santo SA (+12.61%) in the wideners, and Cadbury Holdings Limited (-1.69%), National Grid plc (-1.04%), and Total SA (-0.16%) in the tighteners.The largest absolute movers in Main were Banco Espirito Santo SA (+28bps), Banco Bilbao Vizcaya Argentaria SA (+18.5bps), and UBS AG (+16.5bps) in the wideners, and National Grid plc (-0.75bps), Cadbury Holdings Limited (-0.5bps), and Total SA (-0.07bps) in the tighteners.

The biggest percentage movers in XOver were Societe Air France (+11.3%), Cognis GmbH (+10.79%), and Deutsche Lufthansa AG (+8.56%) in the wideners, and NXP b.v. (-0.58%), BCM Ireland Finance Ltd (+1.22%), and Sol Melia SA (+2.04%) in the tighteners.The largest absolute movers in XOver were Seat Pagine Gialle SpA (+85.07bps), Norske Skogindustrier ASA (+68.95bps), and TUI AG (+51.21bps) in the wideners, and NXP b.v. (-4.96bps), Nordic Telephone Company Holding ApS (+3.54bps), and Infineon Technologies AG (+4.74bps) in the tighteners.

In the names of the HY index, today's biggest percentage movers were Host Hotels & Resorts, L.P. (+9.17%), AMR Corp (+8.49%), and DISH DBS Corporation (+7%) in the wideners, and Massey Energy Company (-2.08%), Unisys Corporation (-1.52%), and Liz Claiborne Inc. (-0.78%) in the tighteners. The largest absolute movers in HY were AMR Corp (+84.4bps), Realogy Corporation (+42.72bps), and Harrah's Operating Co Inc (+33.28bps) in the wideners, and Massey Energy Company (-10bps), Unisys Corporation (-7.5bps), and Dynegy Holdings Inc. (-6.1bps) in the tighteners.

The CDR Counterparty Risk Index Series 2 (of brokers and banks) rose 5.91bps (or 5.86%) to 106.8bps. UBS AG (16.5bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst UBS AG (20.37%) is the worst (relative) performer. HSBC Bank PLC (-9bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and HSBC Bank PLC (-12%) is the best (relative) performer.

The CDR Aussie Index rose 2.28bps (or 3.33%) to 70.85bps. Macquarie Bank Limited (5.58bps) is the worst (absolute) performer, whilst BHP Billiton Ltd (9.52%) is the worst (relative) performer. CSR Limited (-0.02bps) is the best (absolute) performer, and CSR Limited (-0.03%) is the best (relative) performer.

The CDR Asian Index rose 2.36bps (or 2.95%) to 82.42bps. IDBI Bank Limited (11bps) is the worst (absolute) performer, whilst Petroliam Nasional Berhad (10.95%) is the worst (relative) performer. Promise Co Ltd (-2.37bps) is the best (absolute) performer, and Sharp Corporation (-1.94%) is the best (relative) performer.

Comments

[mynhair]

To summarize:  SRS sucks.  Buy IYR instead.  (I think.)

[rubearish10]

Face ZH people, we lose.

[rubearish10]

Face it ZH people, we LOSE!

[Missing_Link]

Speak for yourself.  My trading bot is doing fine!