Daily Credit Summary: August 13 - Credit Non-Confirmation
Spreads were broadly wider in the US as all the indices deteriorated (with HY12 underperforming IG and closing above 800bps for the first time in over two weeks). Indices generally outperformed intrinsics with skews widening in general (as we continue to see single-names leading the market wider and index hedges seemingly dominant) as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew, ExHVOL outperformed but narrowed the skew, XO's skew increased as the index outperformed, and HY's skew widened as it underperformed.
The names having the largest impact on IG are CIT Group Inc (-73.24bps) pushing IG 0.28bps tighter, and Hartford Financial Services Group (+15bps) adding 0.12bps to IG. HVOL is more sensitive with CIT Group Inc pushing it 1.25bps tighter, and Hartford Financial Services Group contributing 0.52bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Valero Energy Corp. (-11.5bps) pushing the index 0.11bps tighter, and Southwest Airlines Co. (+14.25bps) adding 0.14bps to ExHVOL.
The price of investment grade credit fell 0.04% to around 99.38% of par, while the price of high yield credits fell 0.53% to around 88.94% of par. ABX market prices are lower by 0.41% of par or in absolute terms, 0.96%. Broadly speaking, CMBX market prices are lower by 1.73% of par or in absolute terms, 0.52%. Volatility (VIX) is down -0.74pts to 24.71%, with 10Y TSY rallying (yield falling) 11.7bps to 3.6% and the 2s10s curve flattened by 4.5bps, as the cost of protection on US Treasuries fell 0.5bps to 26bps. 2Y swap spreads tightened 1bps to 38.38bps, as the TED Spread tightened by 0.2bps to 0.28% and Libor-OIS improved 0.7bps to 25.5bps.
The Dollar weakened with DXY falling 0.49% to 78.405, Oil rising $0.8 to $70.96 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 0.32% today (a 0.65% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $7.7 to $954.8 as the S&P rallies (1013 1.08%) outperforming IG credits (115bps -0.04%) while IG, which opened tighter at 113.75bps, outperforms HY credits. IG11 and XOver11 are -4.5bps and -9.5bps respectively while ITRX11 is +1bps to 92.5bps (The HY-IG differential over the XOver-Main differential is now greater than 190bps, more than 50bps wider than when we recommended it as HY-XOver moves above 200bps for the first time in three weeks).
The majority of credit curves flattened as the vol term structure steepened with VIX/VIXV decreasing implying a more bearish/more volatile short-term outlook (normally indicative of short-term spread decompression expectations).
Dispersion fell -5.7bps 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.
42% of IG credits are shifting by more than 3bps and 50% of the CDX universe are also shifting significantly (less than the 5 day average of 51%). The number of names wider than the index stayed at 39 as the day's range fell to 5.25bps (one-week average 6.27bps), between low bid at 110.25 and high offer at 115.5 and higher beta credits (2.15%) underperformed lower beta credits (1.93%).
In IG, wideners outpaced tighteners by around 2-to-1, with 72 credits wider (as breadth in single-names remains weak). By sector, CONS saw 59% names wider, ENRGs 44% names wider, FINLs 29% names wider, INDUs 61% names wider, and TMTs 87% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 93.19bps and the latter at 90bps.
Cross Market, we are seeing the HY-XOver spread decompressing to 211.41bps from 185.41bps, but remains above the short-term average of 174.71bps, with the HY/XOver ratio rising to 1.35x, above its 5-day mean of 1.29x. The IG-Main spread decompressed to 22.5bps from 22.38bps, but remains above the short-term average of 21.17bps, with the IG/Main ratio falling to 1.24x, above its 5-day mean of 1.24x.
In the US, non-financials underperformed financials as IG ExFINLs are wider by 2bps to 90bps, with 27 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 1.64bps to 119.33bps, with Brokers (worst) tighter by 0.44bps to 148.83bps, Banks (best) tighter by 3.18bps to 157.83bps, and Finance names tighter by 17.28bps to 894.76bps. Monolines are trading wider on average by 203.78bps (2.91%) to 3689.6bps.
In IG, FINLs outperformed non-FINLs (0.85% tighter to 2.32% wider respectively), with the former (IG FINLs) tighter by 2.5bps to 290.7bps, with 12 of the 21 names tighter. The IG CDS market (as per CDX) is 27.3bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (87.66bps), with the bond ETFs underperforming the IG CDS market by around 0.37bps.
In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 1.19bps to 93.19bps (with ITRX FINLs -trending wider- weaker by 0.25 to 89.75bps) and is currently trading at the wides of the week's range at 100%, between 93.19 to 86.25bps, and is trending wider. Main LoVOL (trend wider) is currently trading at the wides of the week's range at 100.07%, between 68.18 to 62.29bps. ExHVOL outperformed LoVOL as the differential compressed to -0.55bps from 0.55bps, but remains above the short-term average of -0.88bps. The Main exFINLS to IG ExHVOL differential decompressed to 25.56bps from 25.21bps, and remains above the short-term average of 25.37bps.
Commentary compliments of www.creditresearch.com
CDR LQD 50 NAIG091 -0.52bps to 133.39 (25 wider - 20 tighter <> 24 steeper - 24 flatter).
CDX12 IG +1.12bps to 115 ($-0.04 to $99.38) (FV +1.28bps to 122.02) (72 wider - 39 tighter <> 53 steeper - 69 flatter) - Trend Wider.
CDX12 HVOL +1bps to 262 (FV +2.32bps to 316.2) (18 wider - 10 tighter <> 14 steeper - 16 flatter) - Trend Wider.
CDX12 ExHVOL +1.79bps to 68.58 (FV +0.97bps to 67.38) (54 wider - 41 tighter <> 56 steeper - 39 flatter).
CDX11 XO +1.6bps to 280.8 (FV +6.32bps to 328.06) (23 wider - 9 tighter <> 12 steeper - 22 flatter) - No Trend.
CDX12 HY (30% recovery) Px $-0.53 to $88.94 / +16.5bps to 811.9 (FV +5.47bps to 730.33) (55 wider - 35 tighter <> 39 steeper - 54 flatter) - Trend Wider.
LCDX12 (65% recovery) Px $-0.77 to $94.03 / +28.8bps to 701.19 - Trend Wider.
MCDX12 0bps to 145bps. - No Trend.
CDR Counterparty Risk Index fell 1.64bps (-1.36%) to 119.33bps (4 wider - 10 tighter).
CDR Government Risk Index rose 0.75bps (1.7%) to 45.07bps..
DXY weakened 0.49% to 78.41.
Oil rose $0.8 to $70.96.
Gold rose $7.7 to $954.8.
VIX fell 0.74pts to 24.71%.
10Y US Treasury yields fell 11.7bps to 3.6%.
S&P500 Futures gained 1.08% to 1013.