Commentary courtesy of www.creditresearch.com
Spreads were considerably wider across the board today as the peripheral European nation contagion, that we have discussed, started to spread. The scrambling of debt investors dominated any macro data or earnings today as risk appears to be getting repriced fast and furiously and Main traded wide of IG (for the first time on record) as dispersion rose, low beta underperformed, breadth was terribly negative, and movements were considerable in single-name CDS.
IG closed at its widest since 2/25 (with its largest close-to-close jump since 2/4/09) and HY (back below Par) at its widest since 4/9 as VIX spikes, dollar screams higher, EUR dumps, gold pops (yes up!), and S&P trades back to 4/8 levels, and 2010 systemic crash risk rose notably via equity implied correlation. IG's most recent swing from tight to wide (81.5bps to today's 97.75bps) is 16.25bps and is the largest swing since 1/11 to 1/27 but has occurred much faster as we suspect investor anxiety (and inversely conviction) is becoming considerably higher.
Empirically (based on short-term betas) IG and HY were closely in sync and both slightly outperformed the S&P today. Credit indices underperformed intrinsics today as the late day sell-off was led by indices in 5Y which exaggerated 3s5s steepening and 5s10s flattening in both. US FINLs appeared to come back a little (as 5Y came off its intraday wides) but unfortunately this was not the case as we saw 3Y underperform notably as risk is dragged into the shorter-end (kicking and screaming).
As EUR broke 1.32 and we derisked into the close, credit started to lead with IG taking out 97bps and HY offered below par making new wides even as the S&P held its earlier lows. The HY break took us down to 4/20 lows, inching towards 4/12 lows (intraday). This move is similar to the move we saw 4/16 to 4/20 and we suspect too many of these swings will also shake some of that confident insurance company flow.
Some European Observations -> The convexity in SovX is clear as the PIIGS have now inched up to over 73% of SovX risk from mid 60s a month or so ago as we see PIIGS now trade above 350bps on average. Greece 5Y risk remains just inside of ARG and Venezuela but its curve so much more inverted suggests considerably greater cumulative restructuring/default risk. ITRX FINLs vs SovX is clearly having some technical impact as the indices trade notably away from intrinsics in favor of the FINLs underperforming trade.
ITRX FINLs, as one would expect, jumped dramatically today. The Senior FINLs traded back to early MAY09 wides today (with the index now 4bps wide of intrinsics) - further suggesting technical demand is for the Short FINLs credit, Long SovX credit trade. FINLs moved to record wides of Main once again at 36bps but even more of a differential is the gap between ITRX FINLs and ExFINLs which now trades at 45bps - most ever. Liquidity is sparse in both GGBs and Greece CDS (bid-offers large) but we continue to see the CDS-cash basis considerably narrower in 10Y than in 2Y-4Y suggesting market is trying to price in restructuring inflection point around 3Y ish but it is tough to really say given levels.
We once again reiterate that those arguing that Greece is a small percentage of EU GDP, and can be 'contained' seem to have memories of goldfish here - the BSC surprise should have taught us that we don't know what we don't know about the interconnectedness here (in fact we do in many cases now). As troublesome arguing on valuations for sovereign or financial debt is concerned, we find it easier to justify wider spreads than tighter spreads given the lack of real transparency in both cohort's balance sheets.
Movers in Detail
Spreads were broadly wider in the US as all the indices deteriorated. IG trades 7.6bps wide (cheap) to its 50d moving average, which is a Z-Score of 1.5s.d.. At 97.5bps, IG has closed tighter on 73 days in the last 341 trading days (JAN09). The last five days have seen IG diverging from its 50d moving average.
Indices typically underperformed single-names with skews widening in general as IG's skew widened as it underperformed, HVOL outperformed but narrowed the skew, ExHVOL's skew widened as it underperformed, HY's skew widened as it underperformed.
47.2% of names in IG moved more than their historical vol would imply as higher vol names outperformed lower vol names by 4.97% to 6.09%. 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 Du Pont E.I. de Nemours & Co (-11.5bps) pushing IG 0.09bps tighter, and American International Group, Inc. (+33bps) adding 0.24bps to IG. HVOL is more sensitive with Johnson Controls Inc pushing it 0.04bps tighter, and American International Group, Inc. contributing 1.04bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Du Pont E.I. de Nemours & Co (-11.5bps) pushing the index 0.12bps tighter, and Universal Health Services Inc (+18.25bps) adding 0.18bps to ExHVOL.
The price of investment grade credit fell 0.29% to around 100.11% of par, while the price of high yield credits fell 1.19% to around 99.81% of par. ABX market prices are lower by 0.38% of par or in absolute terms, 0.49%. Volatility (VIX) is up 5.47pts to 22.92%, with 10Y TSY rallying (yield falling) 11.7bps to 3.69% and the 2s10s curve flattened by 2.7bps, as the cost of protection on US Treasuries rose 0.25bps to 40.25bps. 2Y swap spreads widened 2.3bps to 22.72bps, as the TED Spread widened by 1.4bps to 0.19% and Libor-OIS deteriorated 0.7bps to 10.1bps.
The Dollar strengthened with DXY rising 0.98% to 82.281, Oil falling $2.32 to $81.88 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 4.07% today (a 1.78% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $15.8 to $1169.3 as the S&P is down (1181 -2.25%) underperforming IG credits (97.5bps -0.29%) while IG, which opened wider at 93bps, outperforms HY credits. IG13 and XOver13 are +6bps and +26bps respectively while ITRX13 is +7.5bps to 96bps.
Dispersion rose +2.8bps 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.
70% of IG credits are shifting by more than 3bps and 69% of the CDX universe are also shifting significantly (more than the 5 day average of 38%). The number of names wider than the index decreased by 1 to 46 as the day's range rose to 5.25bps (one-week average 3.3bps), between low bid at 92.5 and high offer at 97.75 and higher beta credits (4.88%) outperformed lower beta credits (5.26%).
In IG, wideners outpaced tighteners by around 61-to-1, with 122 credits wider. By sector, CONS saw 97% names wider, ENRGs 94% names wider, FINLs 100% names wider, INDUs 96% names wider, and TMTs 100% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG exFINLs) with the former trading at 87.13bps and the latter at 88.55bps.
Cross Market, we are seeing the HY-XOver spread decompressing to 58.83bps from 54.88bps, but remains below the short-term average of 59.41bps, with the HY/XOver ratio rising to 1.13x, below its 5-day mean of 1.14x. The IG-Main spread compressed to 1.5bps from 2.5bps, but remains below the short-term average of 3.14bps, with the IG/Main ratio falling to 1.02x, below its 5-day mean of 1.04x. 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 underperformed financials (optically challenged by the flattening pressure in major FINLs) as IG ExFINLs are wider by 4bps to 88.5bps, with 2 of the 106 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 5.88bps to 134.98bps, with Finance names (worst) wider by 13.8bps to 296.11bps, Banks (best) wider by 1.58bps to 123.75bps, and Brokers wider by 4bps to 186.67bps. Monolines are trading wider on average by 7.2bps (2.19%) to 2159.18bps.
In IG, FINLs underperformed non-FINLs (6.1% wider to 4.77% wider respectively), with the former (IG FINLs) wider by 7.6bps to 131.6bps, with 0 of the 19 names tighter. The IG CDS market (as per CDX) is 25.6bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (71.91bps), with the bond ETFs underperforming the IG CDS market by around 1.65bps.
In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 5.68bps to 87.13bps (with ITRX FINLs -trending wider- weaker by 14.81 to 131.5bps) and is currently trading at the wides of the week's range at 100%, between 87.13 to 76.5bps, and is trending wider. Main LoVOL (trend wider) is currently trading at the wides of the week's range at 100.01%, between 84.63 to 68.99bps. ExHVOL outperformed LoVOL as the differential compressed to -2.13bps from -2.08bps, but remains below the short-term average of -0.36bps. The Main exFINLS to IG ExHVOL differential compressed to 4.63bps from 5.92bps, and remains below the short-term average of 5.75bps.
The Emerging Market index is 1.7% riskier (3.6bps wider) to 216.7bps. EM (Trend Wider) is currently trading at the wides of the week's range at 100.19%, between 216.7 to 204.6bps. The HY-EM spread decompressed to 288.11bps from 261.78bps, and remains above the short-term average of 272.64bps, with the HY/EM ratio rising to 2.33x, above its 5-day mean of 2.3x.
CDR LQD 50 NAIG +3.73bps to 88.81 (48 wider - 2 tighter <> 23 steeper - 25 flatter).
CDX14 IG +6.5bps to 97.5 ($-0.29 to $100.11) (FV +4.45bps to 94.89) (123 wider - 2 tighter <> 40 steeper - 83 flatter) - Trend Wider.
CDX14 HVOL +5bps to 145 (FV +7.42bps to 0) (30 wider - 0 tighter <> 8 steeper - 22 flatter) - Trend Wider.
CDX14 ExHVOL +6.97bps to 82.5 (FV +3.53bps to 80.49) (93 wider - 2 tighter <> 63 steeper - 32 flatter).
CDX14 HY (30% recovery) Px $-1.5 to $99.5 / +37.9bps to 512.7 (FV +21.61bps to 460.51) (98 wider - 1 tighter <> 13 steeper - 87 flatter) - Trend Wider.
LCDX14 (70% recovery) Px $-0.63 to $99.25 / +16.59bps to 269.75 - Trend Wider.
MCDX14 +7.5bps to 132bps. - Trend Wider.
ITRX13 Main +7.31bps to 95.81bps (FV+5.06bps to 92.84bps).
ITRX13 XOver +26.25bps to 446.25bps (FV+18.17bps to 422.09bps).
ITRX13 FINLs +15.31bps to 132bps (FV+10.67bps to 128.99bps).
CDR Counterparty Risk Index rose 5.66bps (4.38%) to 134.76bps (14 wider - 0 tighter).
CDR Government Risk Index rose 6.54bps (7.26%) to 96.61bps..
DXY strengthened 0.96% to 82.26.
Oil fell $2.35 to $81.85.
Gold rose $15.7 to $1169.2.
VIX increased 5.34pts to 22.81%.
10Y US Treasury yields fell 11.7bps to 3.69%.
S&P500 Futures lost 2.29% to 1180.5.
Today's biggest absolute movers in IG were American International Group, Inc. (+33bps), Universal Health Services Inc (+15.75bps), and SLM Corp (+15bps) in the wideners, and Valero Energy Corp. (-4.5bps), Target Corporation (-0.5bps), and Fortune Brands Inc. (+0.25bps) in the tighteners. Today's biggest percentage movers in IG were American International Group, Inc. (+12.6%), ConocoPhillips (+11.24%), and General Mills Inc. (+10.99%) in the wideners, and Valero Energy Corp. (-2.52%), Target Corporation (-1.06%), and Fortune Brands Inc. (+0.21%) in the tighteners.
In the more financial-heavy CDR NAIG LQD 50 index, sentiment is bearish with 48 wider to 2 tighter, and 23 steeper to 25 flatter as 2 of the 50 credits have inverted curves. The biggest absolute movers were Computer Sciences Corp. (+10bps), General Electric Capital Corp (+9.75bps), and Ryder System Inc. (+8.5bps) in the wideners, and Wells Fargo & Company (-1.5bps), Target Corporation (-0.5bps), and Bank of America Corp. (+0.5bps) in the tighteners. The biggest percentage movers in the CDR NAIG LQD 50 were Computer Sciences Corp. (+10.81%), Time Warner Inc. (+8.61%), and Campbell Soup Company (+8%) in the wideners, and Wells Fargo & Company (-1.57%), Target Corporation (-1.06%), and Bank of America Corp. (+0.31%) in the tighteners.
In Main, the biggest percentage movers were Banca Monte dei Paschi di Siena SpA (+21.95%), EDP-Energias de Portugal, S.A. (+19.65%), and Banco Espirito Santo SA (+15.97%) in the wideners, and Technip SA (-0.67%), Bouygues (-0.39%), and Deutsche Bahn AG (-0.37%) in the tighteners.The largest absolute movers in Main were Banco Espirito Santo SA (+57.5bps), EDP-Energias de Portugal, S.A. (+33.25bps), and Banca Monte dei Paschi di Siena SpA (+24.25bps) in the wideners, and Technip SA (-0.45bps), Bouygues (-0.25bps), and Deutsche Bahn AG (-0.2bps) in the tighteners.
The biggest percentage movers in XOver were Gecina SA (+15.58%), Fresenius SE (+12.5%), and Nordic Telephone Company Holding ApS (+11.76%) in the wideners, and Cognis GmbH (-6.67%), Cable & Wireless Plc (-2.66%), and Rhodia SA (0%) in the tighteners.The largest absolute movers in XOver were Seat Pagine Gialle SpA (+150.49bps), Norske Skogindustrier ASA (+76.87bps), and ONO Finance, PLC (+49.21bps) in the wideners, and Cognis GmbH (-10bps), Cable & Wireless Plc (-8.5bps), and Rhodia SA (0bps) in the tighteners.
In the names of the HY index, today's biggest percentage movers were Radian Group Inc (+14.76%), International Lease Finance Corp. (+11.11%), and Beazer Homes USA Inc (+10.99%) in the wideners, and Macy's, Inc. (-0.32%), Smithfield Foods Inc (0%), and Brunswick Corp. (+0.48%) in the tighteners. The largest absolute movers in HY were Radian Group Inc (+82.18bps), K Hovnanian Enterprises, Inc. (+74.1bps), and Freescale Semiconductor, Inc. (+65.33bps) in the wideners, and Macy's, Inc. (-0.5bps), Smithfield Foods Inc (0bps), and RadioShack Corp (+1bps) in the tighteners.
The CDR Counterparty Risk Index Series 2 (of brokers and banks) rose 5.66bps (or 4.38%) to 134.76bps. UBS AG (12bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst UBS AG (9.56%) is the worst (relative) performer. Bank of America Corp. (0.5bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and Bank of America Corp. (0.31%) is the best (relative) performer.
The CDR Aussie Index rose 1.96bps (or 2.77%) to 72.77bps. Qantas Airways Ltd (4.5bps) is the worst (absolute) performer, whilst Telecom Corporation of New Zealand Limited (5.59%) is the worst (relative) performer. CSR Limited (-0.2bps) is the best (absolute) performer, and CSR Limited (-0.32%) is the best (relative) performer.
The CDR Asian Index rose 1.48bps (or 1.72%) to 87.74bps. State Bank of India (10bps) is the worst (absolute) performer, whilst Hyundai Motor Company (10.56%) is the worst (relative) performer. Woori Bank (-2.41bps) is the best (absolute) performer, and Mitsubishi Corp (-2.34%) is the best (relative) performer.