Daily Credit Summary: April 23 - A Weak Week?

Commentary by www.creditresearch.com

A very interesting week with some notable divergences among capital structures and asset classes. Most notable is the widespread underperformance of FINLs, IG corporates, Sovereigns, and TSYs as HY and equities continue to charge higher. Steepening in corporate curves coincided with flattening in TSYs which suggests deep-down some risk-aversion as credit duration is reduced and extended in govvies but HY saw flattening (duration extension) at the short-end which may explain where that risk went.

The notable inflows into HY continue this week (16% of YTD flows in last week alone!) and are apparent by the dramatic outperformance of HY14 this week (over all other credit indices) with 3s5s flattening a little also. A stronger dollar was not enough to stall US risk assets as stocks rallied around 2% but notably oil was up almost $2 and gold up almost $20 on the week as the Greece's suffering and EUR weakness saw flow the main driver of the risk-on trade in the US. While HY-IG compressed in on-the-run indices, off-the-run saw the opposite with IG9 (and IG10!) outperforming IG14 quite considerably and HY9 underperforming HY14/13 (as the latter roll compressed).

A small rise in dispersion was also evident which, based on its size and direction, suggests some more idiosyncratic differentiation that systemic In IG, wideners outpaced tighteners by around 3-to-1, with 90 credits wider. By sector, CONS saw 84% names wider, ENRGs 47% names wider, FINLs 95% names wider, INDUs 48% names wider, and TMTs 79% names wider.  Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG exFINLs) with the former trading at 80.35bps and the latter at 83.8bps.

US HY (cash outperforming synthetics and short-end outperforming longer-end) was the notable outlier as XOver, IG, Main, and the FINLs all widened notably (thanks to sovereign contagion and releveraging fears) and single-name breadth across the CDS universe was weak at around 4-to-3 with slight high beta underperformance. FINLs were the laggards in the US (GS et al) and EUR (Grecian contagion) relative to non-FINLs but in the US it was CONSumer credits that were the notable underperformers and INDUstrials the modest outperformers. Curves were generally slightly steeper in non-FINLs.

From the top-down, index capital structure changes shifted divergently as equity beat credit. The sectors were mixed with CONS (divergent as equity beats credit), ENRG (equity outperformed credit as they both strengthened), FINL (divergent as equity beats credit), INDU (divergent as equity beats credit), and TMT (divergent as equity beats credit).

CDX-based regression betas indicate that TMT (1.06x) have the highest beta and ENRG (0.9x) the lowest, with INDU (1.03x), CONS (0.97x), and FINL (0.92x) in between. Comparing the regression betas to current level betas we see that CONS (0.13x rich) is the richest sector, while FINL (-0.37x cheap) is the cheapest, with INDU (0.1x rich), ENRG (0x rich), and TMT (-0.02x cheap) trading more in line.

SovX widened 20bps on the week with the PIIGS (61bps wider on average) the main drag but somewhat surprisingly the UK managed to eke out a 1bps compression (despite hung parliament expectations rising). 5Y GGBs were 220bps wider as opposed to 5Y CDS around 152bps wider (both vs Germany) but CEEMEA was considerable decompression but EM managed only marginal widening (as oil improved?). Germany widened 8.5bps this week as the US rallied a modest 0.5bps at what point does Germany seriously consider an EU exit (prisoner's dilemma?) given it is now its riskiest relative to the USA ever in CDS land. Focusing on intra-sector movements within IG, we notice dispersion increasing the most in FINL which shifted 6.64% to 79.8bps,  and the least in TMT which shifted -1.63% to 37.3bps.

HY-LCDX compressed almost 30bps this week as we suspect the switch from loan index out to single-names as some supply came to market combined with HY inflows helped this move. While HY-IG compression was the clear theme, we suspect this was less about that as a specific trade (since HY remains notably cheap to intrinsics and IG index and intrinsics tracked closely) and more about a capitulative reach for yield, more specifically in yieldy bonds. The talk this week has been insatiable demand from insurance companies remains for anything with yield (in cash) and while we understand the mandate-driven nature of asset allocation, any exogenous event could trigger a quite considerable gap in our view as this buyer-of-first-resort disappears.

Index/Intrinsics Changes (Friday-to-Friday) CDR LQD 50 NAIG +4.19bps to 81.5 (37 wider - 5 tighter <> 31 steeper - 19 flatter).
CDX14 IG +1.5bps to 89 ($-0.05 to $100.49) (FV +1.97bps to 89.49) (86 wider - 26 tighter <> 67 steeper - 55 flatter) - No Trend.
CDX14 HVOL +10bps to 140 (FV +3.44bps to 0) (22 wider - 7 tighter <> 16 steeper - 14 flatter) - Trend Wider.
CDX14 ExHVOL -1.18bps to 72.89 (FV +1.52bps to 76.35) (64 wider - 31 tighter <> 44 steeper - 51 flatter).
CDX14 HY (30% recovery) Px $+0.59 to $100.97 / -14.8bps to 475.5 (FV -18.03bps to 445.59) (27 wider - 71 tighter <> 62 steeper - 36 flatter) - Trend Tighter.
LCDX14 (70% recovery) Px $-0.5 to $100 / +12.96bps to 250 - Trend Wider.
MCDX14 +2bps to 122bps. - No Trend.
ITRX13 Main +6.88bps to 86.63bps (FV+5.98bps to 86.07bps).
ITRX13 XOver +11bps to 422bps (FV+16.88bps to 412.46bps).
ITRX13 FINLs +15.82bps to 111.63bps (FV+19.34bps to 114.96bps).
CDR Counterparty Risk Index rose 20.35bps (20.17%) to 121.24bps (13 wider - 1 tighter).
CDR Government Risk Index rose 7.41bps (9.42%) to 86bps..
DXY strengthened 0.69% to 81.39.
Oil rose $1.84 to $85.08.
Gold rose $19.88 to $1157.28.
VIX fell 1.74pts to 16.62%.
10Y US Treasury yields rose 5.1bps to 3.82%.
S&P500 Futures gained 1.85% to 1212.3.

Single-Name Movers (Friday-to-Friday)
Today's biggest absolute movers in IG were SLM Corp (+31.97bps), Universal Health Services Inc (+24.5bps), and General Electric Capital Corp (+15.25bps) in the wideners, and RR Donnelley & Sons Company (-11.83bps), Freeport-McMoRan Copper & Gold Inc. (-5.63bps), and Omnicom Group (-4bps) in the tighteners. Today's biggest percentage movers in IG were Universal Health Services Inc (+15.26%), General Electric Capital Corp (+14.49%), and American Express Company (+12.77%) in the wideners, and RR Donnelley & Sons Company (-6.07%), Omnicom Group (-5.23%), and Halliburton Company (-5.22%) in the tighteners.

In the more financial-heavy CDR NAIG LQD 50 index, sentiment is very bearish with 37 wider to 7 tighter, and 32 steeper to 18 flatter as 2 of the 50 credits have inverted curves. The biggest absolute movers were Bank of America Corp. (+34.25bps), Citigroup Inc (+30.75bps), and Goldman Sachs Group Inc (+19bps) in the wideners, and GATX Corporation (-3bps), Xerox Corp. (-2.26bps), and Norfolk Southern Corp. (-1.25bps) in the tighteners. The biggest percentage movers in the CDR NAIG LQD 50 were Bank of America Corp. (+29.98%), Citigroup Inc (+22.4%), and JP Morgan Chase & Co. (+19.26%) in the wideners, and Norfolk Southern Corp. (-2.43%), Xerox Corp. (-1.97%), and GATX Corporation (-1.85%) in the tighteners.

In Main, the biggest percentage movers were Banco Espirito Santo SA (+55.41%), UBS AG (+52.7%), and Banco Bilbao Vizcaya Argentaria SA (+29.7%) in the wideners, and Cadbury Holdings Limited (-11.86%), Anglo American Plc (-3.89%), and National Grid plc (-1.04%) in the tighteners.The largest absolute movers in Main were Banco Espirito Santo SA (+123bps), UBS AG (+42.69bps), and Banco Bilbao Vizcaya Argentaria SA (+40.24bps) in the wideners, and Anglo American Plc (-3.75bps), Cadbury Holdings Limited (-3.5bps), and Telecom Italia SpA (-1.25bps) in the tighteners.

The biggest percentage movers in XOver were Nordic Telephone Company Holding ApS (+22.91%), Cable & Wireless Plc (+14.48%), and Norske Skogindustrier ASA (+10.74%) in the wideners, and Infineon Technologies AG (-12.31%), Volvo AB (-6.15%), and NXP b.v. (-4.23%) in the tighteners.The largest absolute movers in XOver were Norske Skogindustrier ASA (+106.43bps), Seat Pagine Gialle SpA (+86.69bps), and Sol Melia SA (+47.62bps) in the wideners, and NXP b.v. (-36.05bps), Infineon Technologies AG (-24.57bps), and Volvo AB (-10.92bps) in the tighteners.

In the names of the HY index, today's biggest percentage movers were International Lease Finance Corp. (+17.24%), Mirant North America LLC (+16.76%), and DISH DBS Corporation (+8%) in the wideners, and Qwest Capital Funding Inc (-41.59%), Radian Group Inc (-30.66%), and Standard-Pacific Corp (-25.9%) in the tighteners. The largest absolute movers in HY were International Lease Finance Corp. (+62.5bps), AMR Corp (+51.5bps), and Mirant North America LLC (+35.61bps) in the wideners, and Radian Group Inc (-262.35bps), K Hovnanian Enterprises, Inc. (-192.66bps), and Dynegy Holdings Inc. (-160.03bps) in the tighteners.

The CDR Counterparty Risk Index Series 2 (of brokers and banks) rose 20.23bps (or 20.06%) to 121.12bps. UBS AG (42.69bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst UBS AG (52.7%) is the worst (relative) performer. HSBC Bank PLC (-4bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and HSBC Bank PLC (-5.33%) is the best (relative) performer.

The CDR Aussie Index rose 2.49bps (or 3.63%) to 71.06bps. Qantas Airways Ltd (5.55bps) is the worst (absolute) performer, whilst BHP Billiton Ltd (8.04%) is the worst (relative) performer. Wesfarmers Limited (-0.44bps) is the best (absolute) performer, and Wesfarmers Limited (-0.65%) is the best (relative) performer.

The CDR Asian Index rose 6.49bps (or 8.11%) to 86.55bps. Acom Co Ltd (39.17bps) is the worst (absolute) performer, whilst Toyota Motor Corporation (36.24%) is the worst (relative) performer. SK Telecom Co Ltd (-0.5bps) is the best (absolute) performer, and SK Telecom Co

Comments

[Mitchman]

For an excellent weekly market recap and some great opinion pieces, check out Martin Hutchinson's The Prudent Bear page at:  http://www.prudentbear.com/

[anynonmous]

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[anynonmous]

Front Page of Toronto's main newspaper

http://www.thestar.com/yourhome/realestate/article/799961--canadian-hous...

"Why Toronto's Housing Market is Overdue for a 20% Tumble"

"Get set for the great Canadian housing market correction, at least according to one prominent economist"

and the economist is none other Rosie!

Conclusion:

I think it's time to invest in Canadian real estate