Daily Credit Summary: August 17 - Ch Ch Ch Changes
Spreads were broadly wider in the US as all the indices deteriorated (with HY underperforming IG once again as both reached 3-4 week wides but IG maintained a very tight range like stocks while HY slipped all day). Indices generally outperformed intrinsics with skews widening in general as IG's skew decompressed as the index beat intrinsics (HY-IG and IG hedge technicals holding IG back), HVOL underperformed but narrowed the skew, ExHVOL outperformed pushing the skew wider, XO's skew increased as the index outperformed, and HY's skew widened as it underperformed. (The HY-IG differential is a better indeication of risk aversion currently than IG since technicals are holding IG back and we note thios would imply a higher VIX and 950 S&P give or take - given empirical levels).
The names having the largest impact on IG are Quest Diagnostics Incorporated (-1bps) pushing IG 0.01bps tighter, and CIT Group Inc (+102.23bps) adding 0.38bps to IG. HVOL is more sensitive with Canadian Natural Resources Limited pushing it 0.3bps tighter, and CIT Group Inc contributing 1.7bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Quest Diagnostics Incorporated (-1bps) pushing the index 0.01bps tighter, and Constellation Energy Group Inc. (+26.65bps) adding 0.26bps to ExHVOL.
The price of investment grade credit fell 0.25% to around 99.05% of par, while the price of high yield credits fell 1.44% to around 86.69% of par. ABX market prices are lower by 0.25% of par or in absolute terms, 0.72%. Broadly speaking, CMBX market prices are lower by 0.3% of par or in absolute terms, 1%. Volatility (VIX) is up 3.62pts to 27.89%, with 10Y TSY rallying (yield falling) 10.1bps to 3.47% and the 2s10s curve flattened by 6bps, as the cost of protection on US Treasuries rose 2.62bps to 29bps. 2Y swap spreads widened 0.6bps to 40.56bps, as the TED Spread widened by 0.1bps to 0.26% and Libor-OIS deteriorated 0.1bps to 25bps.
The Dollar strengthened with DXY rising 0.53% to 79.307, Oil falling $0.68 to $66.83 (underperforming the dollar as the value of Oil (rebased to the value of gold) rose by 0.57% today (a 0.48% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $14.87 to $933.68 as the S&P is down (976.5 -2.91%) underperforming IG credits (123bps -0.25%) while IG, which opened wider at 121.5bps, outperforms HY credits. IG11 and XOver11 are +5.17bps and +27.53bps respectively while ITRX11 is +4.71bps to 99.5bps.
Dispersion rose +10.7bps 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.
78% of IG credits are shifting by more than 3bps and 76% of the CDX universe are also shifting significantly (more than the 5 day average of 64%). The number of names wider than the index stayed at 40 as the day's range fell to 3.5bps (one-week average 5.52bps), between low bid at 120 and high offer at 123.5 and higher beta credits (8.49%) underperformed lower beta credits (7.58%).
In IG, wideners outpaced tighteners by around 22-to-1, with 123 credits notably wider. By sector, CONS saw 97% names wider, ENRGs 100% names wider, FINLs 100% names wider, INDUs 96% names wider, and TMTs 100% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 100.28bps and the latter at 101.67bps.
Cross Market, we are seeing the HY-XOver spread decompressing to 252.08bps from 233.35bps, but remains above the short-term average of 201.97bps, with the HY/XOver ratio rising to 1.4x, above its 5-day mean of 1.33x. The IG-Main spread decompressed to 23.5bps from 21.99bps, and remains above the short-term average of 22.35bps, with the IG/Main ratio rising to 1.24x, below its 5-day mean of 1.24x.
In the US, non-financials underperformed financials as IG ExFINLs are wider by 7.6bps to 101.7bps, with 2 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 8.96bps to 132.06bps, with Brokers (worst) wider by 13.38bps to 167.83bps, Finance names (best) wider by 36.85bps to 953.78bps, and Banks wider by 10.68bps to 175.79bps. Monolines are trading wider on average by 462.46bps (7.26%) to 4285.92bps.
In IG, FINLs outperformed non-FINLs (5.61% wider to 8.07% wider respectively), with the former (IG FINLs) wider by 16.7bps to 313.9bps, with 0 of the 21 names tighter. The IG CDS market (as per CDX) is 26.6bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (96.42bps), with the bond ETFs underperforming the IG CDS market by around 0.57bps.
In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 4.51bps to 100.28bps (with ITRX FINLs -trending wider- weaker by 5.5 to 96.38bps) and is currently trading at the wides of the week's range at 100%, between 100.28 to 86.25bps, and is trending wider. Main LoVOL (trend wider) is currently trading at the wides of the week's range at 100.03%, between 72.97 to 62.29bps. ExHVOL outperformed LoVOL as the differential compressed to -2.71bps from -0.99bps, but remains below the short-term average of 0.03bps. The Main exFINLS to IG ExHVOL differential decompressed to 30.02bps from 26.61bps, but remains above the short-term average of 25.49bps.
Commentary compliments of www.creditresearch.com
CDR LQD 50 NAIG091 +10.24bps to 148.82 (49 wider - 0 tighter <> 26 steeper - 22 flatter).
CDX12 IG +6.22bps to 123 ($-0.25 to $99.05) (FV +8.98bps to 135.4) (123 wider - 2 tighter <> 66 steeper - 58 flatter) - Trend Wider.
CDX12 HVOL +22.42bps to 290 (FV +21.27bps to 348.91) (30 wider - 0 tighter <> 8 steeper - 22 flatter) - Trend Wider.
CDX12 ExHVOL +1.1bps to 70.26 (FV +5.4bps to 76.16) (93 wider - 2 tighter <> 37 steeper - 58 flatter).
CDX11 XO +16.3bps to 304.3 (FV +23.16bps to 357.44) (34 wider - 0 tighter <> 13 steeper - 21 flatter) - Trend Wider.
CDX12 HY (30% recovery) Px $-1.5 to $86.63 / +48.3bps to 884.6 (FV +34.72bps to 780.43) (89 wider - 6 tighter <> 19 steeper - 76 flatter) - Trend Wider.
LCDX12 (65% recovery) Px $-1.66 to $91.63 / +68bps to 797.22 - Trend Wider.
MCDX12 +1.33bps to 145bps. - No Trend.
CDR Counterparty Risk Index rose 8.91bps (7.23%) to 132.01bps (14 wider - 0 tighter).
CDR Government Risk Index rose 2.17bps (4.77%) to 47.62bps..
DXY strengthened 0.53% to 79.31.
Oil fell $0.68 to $66.83.
Gold fell $14.87 to $933.68.
VIX increased 3.62pts to 27.89%.
10Y US Treasury yields fell 10.3bps to 3.47%.
S&P500 Futures lost 2.91% to 976.5.