Daily Credit Summary: April 8 - PIIGS Can Fly

Commentary courtesy of www.creditresearch.com

Market Summary

Spreads were broadly wider in the US as all the indices deteriorated. IG trades 7.3bps tight (rich) to its 50d moving average, which is a Z-Score of -0.9s.d.. At 87.25bps, IG has closed tighter on only 16 days in the last 327 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 underperformed but narrowed the skew, HVOL underperformed but widened the skew, ExHVOL intrinsics beat and narrowed the skew, HY's skew widened as it underperformed.

A tiny 4% of names in IG moved more than their historical vol would imply as higher vol names underperformed lower vol names by 0.87% to 0.6%. 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 (-5.34bps) pushing IG 0.04bps tighter, and SLM Corp (+9.5bps) adding 0.08bps to IG. HVOL is more sensitive with DirecTV Holdings LLC pushing it 0.13bps tighter, and SLM Corp contributing 0.32bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both UnitedHealth Group Inc (-5.34bps) pushing the index 0.05bps tighter, and Verizon Communications Inc (+6bps) adding 0.06bps to ExHVOL.

The price of investment grade credit fell 0.14% to around 100.57% of par, while the price of high yield credits fell 0.38% to around 98.75% of par. ABX market prices are higher (improving) by 0.26% of par or in absolute terms, 1.35%. Volatility (VIX) is up 0.39pts to 16.84%, with 10Y TSY rallying (yield falling) 9.5bps to 3.86% and the 2s10s curve flattened by 0.7bps, as the cost of protection on US Treasuries fell 0.91bps to 41.75bps. 2Y swap spreads tightened 0bps to 13.88bps, as the TED Spread widened by 0.3bps to 0.13% and Libor-OIS deteriorated 0bps to 8.3bps.

The Dollar strengthened with DXY rising 0.19% to 81.543, Oil falling $1.16 to $85.68 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 2.59% today (a 1.15% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $14.65 to $1148.95 as the S&P is down (1179.1 -0.57%) underperforming IG credits (87.25bps -0.14%) while IG, which opened wider at 85.5bps, outperforms HY credits. IG12 and XOver12 are +2.06bps and +5bps respectively while ITRX12 is +3.54bps to 76bps.

The majority of credit curves steepened as the vol term structure flattened with VIX/VIXV rising implying a more bullish/less volatile short-term outlook (normally indicative of short-term spread compression expectations), and additionally the ratio has dropped below 0.9x which is exceptionally bearish for stocks and spreads.

Dispersion rose +0.5bps 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 decreasing more than expected today indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads. Only 10% of IG credits are shifting by more than 3bps and 24% of the CDX universe are also shifting significantly (less than the 5 day average of 25%). The number of names wider than the index decreased by 1 to 51 as the day's range rose to 2.75bps (one-week average 2.26bps), between low bid at 85.25 and high offer at 88 and higher beta credits (1.1%) underperformed lower beta credits (0.56%). In IG, wideners outpaced tighteners by around 3-to-1, with 69 credits wider. By sector, CONS saw 55% names wider, ENRGs 65% names wider, FINLs 53% names wider, INDUs 41% names wider, and TMTs 67% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG exFINLs) with the former trading at 75.88bps and the latter at 84.43bps.

Cross Market, we are seeing the HY-XOver spread compressing to 102.6bps from 104.78bps, but remains below the short-term average of 112.11bps, with the HY/XOver ratio falling to 1.24x, below its 5-day mean of 1.26x. The IG-Main spread decompressed to 7.5bps from 7.25bps, but remains below the short-term average of 7.97bps, with the IG/Main ratio falling to 1.09x, below its 5-day mean of 1.1x. Among the HY names, we see higher risk names (>500bps) outperforming lower risk (<500bps) names. Notably, there is compression between the high and low beta names. In the IG names, we see higher beta names underperforming lower beta names.

In the US, non-financials outperformed financials as IG ExFINLs are wider by 0.5bps to 84.4bps, with 23 of the 106 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 1.87bps to 99.33bps, with Brokers (worst) wider by 2bps to 121.83bps, Finance names (best) wider by 1.98bps to 281.73bps, and Banks wider by 1.42bps to 96.83bps. Monolines are trading tighter on average by -35bps (2.05%) to 2580.5bps. In IG, FINLs underperformed non-FINLs (1.07% wider to 0.65% wider respectively), with the former (IG FINLs) wider by 1.3bps to 124.6bps, with 3 of the 19 names tighter. The IG CDS market (as per CDX) is 23.4bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (63.84bps), with the bond ETFs underperforming the IG CDS market by around 0.21bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 2.54bps to 75.88bps (with ITRX FINLs -trending wider- weaker by 4.87 to 95.25bps) and is currently trading at the wides of the week's range at 100%, between 75.88 to 73.34bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading at the wides of the week's range at 99.84%, between 67.36 to 64.36bps. ExHVOL underperformed LoVOL as the differential decompressed to 3.87bps from 3.22bps, and remains above the short-term average of 3.23bps. The Main exFINLS to IG ExHVOL differential compressed to 4.66bps from 5.76bps, but remains below the short-term average of 5.9bps.

The Emerging Market index is 1% riskier (2.1bps wider) to 213.8bps. EM (No Trend) is currently trading in the middle of the week's range at 33.15%, between 226.4 to 207.5bps. The HY-EM spread decompressed to 318.34bps from 310.61bps, but remains below the short-term average of 320.53bps, with the HY/EM ratio rising to 2.49x, below its 5-day mean of 2.49x.

Index Internals
Within the 240 name CDX Index Universe, sentiment is significantly bearish, with 118 (50%) wideners to 71 (30%) tighteners and 112 (47%) steepeners to 121 (51%) flatteners (1.7 wideners for every tightener). Among this universe, there are 31 credits with a bullish trend, and 3 with a bearish trend (based on the previous five days trading action). The market's general sentiment is evident as we note that 38 credits are at the widest in their 5-day range currently, and 84 are at their tightest. Notably, from the 240 name index universe, there are 25 (~10%) credits that have inverted curves, with an average inversion of 35% of 5Y CDS.

Within the IG universe, dispersion overall has risen 0.5bps to 49.5bps, as the wings of the distribution (10-90%) decreased less than the centre (25-75%) of the distribution. The distribution shifted non-linearly as the 10th percentile increased the most (1.9bps /4.13%) to 46.7bps, and the 90th percentile increased the least (-0.6bps /-0.41%) to 146bps.

Breakeven analysis shows that the IG13 5s10s steepener, at 26.3bps carry, covers 7.49bps of flattening/inversion or 0.4 defaults over the next year. The indices themselves have very different breakevens with ITRX8 covering 3.7 defaults over its remaining life, and one year's carry covers 25.53bps widening (38%) or 1.4 defaults. XOver8=> 8.3 contract defaults, with 169.74bps widening (41%) or 3.4 defaults covered by one-year carry. ITRX12=> 7 contract defaults, with 17.25bps widening (23%) or 1.6 defaults covered by one-year carry. XOver12=> 12.6 contract defaults, with 98.44bps widening (26%) or 3.2 defaults covered by one-year carry. IG9 5Y=> 5.1 contract defaults, with 37.79bps widening (39%) or 2 defaults covered by one-year carry. IG9 7Y=> 9.9 contract defaults, with 27.11bps widening (24%) or 2.3 defaults covered by one-year carry. IG9 10Y=> 15.9 contract defaults, with 19.92bps widening (16%) or 2.5 defaults covered by one-year carry. IG13 5Y=> 7.3 contract defaults, with 19.07bps widening (23%) or 1.7 defaults covered by one-year carry. IG13 7Y=> 11.1 contract defaults, with 16.24bps widening (17%) or 1.9 defaults covered by one-year carry. IG13 10Y=> 16.2 contract defaults, with 13.81bps widening (13%) or 2.2 defaults covered by one-year carry. ExHVOL13=> 4.9 contract defaults, with 16.55bps widening (23%) or 1.1 defaults covered by one-year carry. HVOL13=> 2.9 contract defaults, with 32.46bps widening (24%) or 0.7 defaults covered by one-year carry. HY13=> 28.1 contract defaults, with 142.59bps widening (27%) or 7.5 defaults covered by one-year carry. LCDX12=> 33.9 contract defaults, with 114.16bps widening (31%) or 10.5 defaults covered by one-year carry.

IG Sector Moves and Betas
In IG, TMT (the worst sector) out-performed IG, moving (on average) 1.2bps (1.27%) wider to an average of 95.1bps. ENRG (the second weakest sector) out-performed IG, moving (on average) 1bps (1.2%) wider to an average of 88.5bps. FINL (the median sector) out-performed IG, moving (on average) 1.3bps (1.07%) wider to an average of 124.6bps. CONS (the second best sector) out-performed IG, moving (on average) 0.2bps (0.29%) wider to an average of 76.8bps. INDU (the best sector) out-performed IG, moving (on average) 0.1bps (0.12%) wider to an average of 83.1bps.

From the top-down, index capital structure changes shifted both weaker with credit outperforming equity. The sectors were mixed with CONS (equity beating credit as they both deteriorate), ENRG (both weaker with credit outperforming equity), FINL (both weaker with credit outperforming equity), INDU (equity beating credit as they both deteriorate), and TMT (equity beating credit as they both deteriorate).

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 (0.16x rich) is the richest sector, while FINL (-0.39x cheap) is the cheapest, with INDU (0.09x rich), ENRG (0.02x rich), and TMT (-0.05x cheap) trading more in line.

Focusing on intra-sector movements within IG, we notice dispersion increasing the most in FINL which shifted 2.17% to 76.4bps, and the least in CONS which shifted -1.04% to 35.5bps.

Index/Intrinsics Changes

CDR LQD 50 NAIG +0.72bps to 79.3 (29 wider - 10 tighter <> 24 steeper - 23 flatter).
CDX14 IG +3.25bps to 87.25 ($-0.14 to $100.57) (FV +0.66bps to 90.56) (69 wider - 26 tighter <> 65 steeper - 56 flatter) - No Trend.
CDX14 HVOL +2bps to 138 (FV +1.17bps to 136.28) (18 wider - 5 tighter <> 15 steeper - 15 flatter) - Trend Tighter.
CDX14 ExHVOL +3.64bps to 71.22 (FV +0.5bps to 76.3) (51 wider - 44 tighter <> 45 steeper - 50 flatter).
CDX14 HY (30% recovery) Px $-0.38 to $98.75 / +9.8bps to 532.1 (FV -0.07bps to 496.5) (44 wider - 39 tighter <> 39 steeper - 60 flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $-0.13 to $105.63 / +3.34bps to 369.69 - Trend Tighter.
MCDX12 +7.33bps to 138.33bps. - No Trend.
CDR Counterparty Risk Index rose 1.87bps (1.92%) to 99.33bps (14 wider - 0 tighter).
CDR Government Risk Index rose 2.33bps (3.19%) to 75.54bps..
DXY strengthened 0.19% to 81.54.
Oil fell $1.16 to $85.68.
Gold rose $14.65 to $1148.95.
VIX increased 0.39pts to 16.84%.
10Y US Treasury yields fell 9.5bps to 3.86%.
S&P500 Futures lost 0.57% to 1179.1.

Comments

[Neophiliac]

And in the meantime in Greece - we're up to 424 bps!

http://econskeptic.blogspot.com/

[-1Delta]

Euro...

[mark456]

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