Commentary courtesy of www.creditresearch.com
Spreads tightened across Europe and the US today with indices outperforming intrinsics thanks to rumors of JPY intervention and headlines proclaiming European sovereign fears over, the US recovery still in place, a 'coming' M&A boom, and the start of the Fed POMO encouraging risk-taking.
The thinness of markets (given the summer slump and general lack of desire) enabled modest re-risking to move markets rapidly at the index levels across sovereigns, financials, and corporates in the US and Europe. The completion of the Irish and Spanish debt issues today seemed in and of itself enough to get everyone going (despite notably higher yields in the former and suspected 'help' from the ECB in both) and despite a major drop in German confidence, bond spreads and CDS compressed relative to Bunds with a feeling of squeeze to the move in SovX today - 9bps tighter vs 6bps intrinsics and leaving the index notably rich to intrinsics overall.
5Y Bunds were 3bps higher in yield versus a 3bps compression in Germany's CDS - hhmm - as Spain rallied 17bps in bond-land against zee germans. 13bps in 5Y CDS for Spain was not the best relative performer though as Ireland compressed 28bps in 5Y CDS (back under 300bps) but notably only back to last Thursday's wides (not exactly the ringing endorsement that all is well). PIIGS were on average 16bps tighter on the day - a decent move obviously - but leaves them at an average 350bps - same as last Thursday's level. We note that Greece remains extremely wide still (having not enjoyed much compression today - still 15bps wider than Friday's close). Holland was the underperformer today - perhaps on backlash from their world cup loss and France's Anelka ban today.
EU FINLs obviously benefited from this and compressed more or less in line with expectations - around 8bps or so (also notably outperforming intrinsics) as Main ExFINLs rallied just over 5bps to 105bps - its best since last Tuesday.
XOver's relative stability the last few days was cracked as it broke back below 500bps to close at 490bps - still wider than last Tuesday's close as XOver-Main finally lost its battle with 400bps differential (to the downside this time) but XOver jumped notably more than intrinsics (closing the skew to much more in line). So all-in-all, risk in Europe is back to mid Tuesday/Wednesday context from last week - somewhat biased to Wednesday's riskier side - and this is a similar story for US risk which opened well after overnight help from chatter about JPY intervention rallied the carry pairs helping futures.
IG and Main compressed but perhaps most notably IG ExFINLs and Main ExFINLs are now only 3bps apart at 101.5 and 104.5 respectively as we are seeing the SovX-Main-Finls complex revert a little back to its recent empirical context.
The off-again POT deal and some chatter over BSX (along with PTV and Lubrizol - previous LBO candidates) combined with the ever-present line of cash on sidelines or balance sheets (which we have summarily dismissed recently as nonsense in general and worse in specific terms when considering both asset and liability sides of the balance sheet) encouraged some risk taking and thanks to the European sovereign issues equities rallied out of the gate - helped by slightly better than expected industrial production and capacity utilization numbers (just how much of our economy does this represent anyway and also - absolute level fo these indices remain extremely weak - forget about second derivatives for a minutes).
Credit opened a smidge better than last night's close but no big surprise with the building permits and housing starts data (weaker than expected) somewhat balanced domestic issues - even as Geithner, Gross, et al. tried to fix the GSEs. We drifted higher in stocks and tighter in spreads until the start of the Fed's first QE lite POMO and then zoom, we rallied (as has been the case in pretty much 100% of the days when the Fed does its magic). Stocks (and to a lesser degree credit) disconnected from AUDJPY and TSYs for that period as the $2.5bn purchases pushed the S&P perhaps 10pts expensive to its 'correlated' assets would suggest.
Stocks broke the last few day's channel and moved up handsomely with an initial burst of volume but no follow through and credit followed the same way - having rallied into the POMO on the macro data views and then gapped tighter quite quickly to the mid Tuesday/Wednesday context from last week. Notably, HY (which appeared much more active today in movement rallied less in the context of the last week that IG did). What I mean is, IG made it back to 105.75bps bid at its best today, which is 1.5bps tighter than last Wednesday's tights BUT HY rallied only to 556bps today at its best, which is exactly the tights of last Wednesday.
The lack of follow-through by AUDJPY, 10Y rates, or even 2s10s today as stocks dislocated higher seemed to hit a wall as AUDJPY was unable to take out its highs of last week at around 77.8 and rolled over, this started to shake stocks a little as they were unable to get up to the magical 1100 level in S&P futures. The lack of follow-through from POMO buying (let us have our little conspiracy theory for today) saw spreads also cap out and revert as the gappy compression we saw in the morning was filled on the way back down with more consistent trading in credit.
There was no news but we did notice a new relationship, that we shared with many clients who were asking for guidance today, and that was the 2s10s30s butterfly as the new carry vehicle - since 2s10s has dislocated - its early but as that butterfly rolled over so we saw stocks start to run and risk-off become the rule as volumes picked up and the $2.5bn of purchased S&P futures went to almost total waste (again let us joke - we needed it).
HY bounced off those $97.5 high prices and retraced 10-12bps off its best levels of the day - still ending with a decent compression at the index level but notably both IG and HY were almost perfectly in line (from a beta-adjusted basis) with stocks today - something we have not seen recently (most days has been either a HY outperformance or systemic stock outperformance). We suspect today;s much more systemic adjustment with very slight HY underperformance (<1bps) and IG outperformance (<1bps) relative to stocks/vol is more thanks to the Fed's injection (some new cash to play with) than anyone putting money to work with conviction.
IG and HY pretty much closed in the middle of the day's range - just better than their opening levels as stocks retraced a decent chunk of the rally into and beyond the close. In after-hours a slow drift lower in stocks - at around their VWAP - saw IG make it back wider to close at last Wednesday's tights exactly at 107.25bps (which was wider than the gap up from Tuesday's wides of 106bps - we did not fill that gap and as we mentioned above HY remained above those tights all day.
Interestingly, IG9 outperformed IG14 today as the roll compressed a little (reversing a short-term trend for now - though end of day liquidity could be at play here) while HY9 underperformed HY14. This is not entirely crazy given the relative components of IG9 and HY14 and its tails but action was busier than normal in the rolls today from a number of dealers.
Bottom-up, we saw the majority of 3s5s curves flatten today even as we rallied as single-names in general underperformed the indices but put in a notably positive breadth day. High beta outperformed low beta as financials outperformed non-financials leaving CONSumer credits underperforming (WMT miss and TGT dumping its Garden centers maybe?). The HY proxy insurers did well but slightly underperformed (on a beta-adjusted basis) the HY move - which has previously signaled a slight overdone move in HY.
Our broad universe of CDS showed on average a 2% compression in spreads and encouragingly consistently LBO-names underperformed and CDO-names outperformed based on our indices.
Ratings cohorts showed a preference for crossover credits over the tails (high and low) with single-Bs seemingly best of all but no groups actually widened on average today as early reracks held in for the most part.
Financials, Leisure, Media, and Telecoms were the best performers with Capital Goods, Utilities, and Healthcare the worst performers - risk-on I guess! Interestingly, Aerospace and Defense and Pharma actually showed very modest decompression today.
Worst performing names (on a DV01-adjusted basis) were Pactiv, Universal Corp, RRI Energy, Smithfield Foods, Standard-Pacific, Sears, Nordstrom, Altria, Best Buy, and Radioshack (but I thought the consumer was the driver of our economy?). The best performers were FSL, Dynegy, CCU, FDC, Level 3 Comms, Radian, Dole Foods, AK Steel, MGM, SFI, Amkor, and TOY and SKS were in there. So today was sell the consumer, buy the riskiest stuff and cross your fingers day I guess.
In capital structure land, we note that the great majority of names (69%) agreed between equity and credit that things were better today with only 5 names (CAL, UAUA, LVLT, YRCW, and BBY) agreeing on weakness. 13% of names were wider today in credit versus only 7.6% of names lower in stock price in our universe which left 24% of our universe divergent with equity higher and credit wider and 6% showing equity prices lower and credit tighter.
All sectors were in agreement on overall improvement today at the aggregate level and all but Financials and Telecoms saw stocks outpacing credit (on a risk-adjusted basis). At the other end Basic Materials and Capital Goods saw stocks outperforming the most relative to credit's vol-adjusted moves.
The move in POT was the most extreme (in vol-adjusted terms) with Pactiv close behind as the equity improvement far outweighed the relative performance of credit (tighter in the case of Potash and wider in Pactiv's case).
Other notable moves were in LLY, SFD, and KFT (most divergent equity underperformers relative to credit) and HON, PKG, RTN, and HD in terms of credit underperformance against equity improvement (following PTV's move). Across the Chemicals group of Basic Materials (where Potash and Lubrizol reside), we saw most names better on the day in both equity and credit with all but Olin Corp (the old IG favorite) seeing equity outperforming credit on a risk-adjusted basis. DuPont, Monsanto, and Ashland were unch today in CDS land though while stocks rallied (with the latter trading on top of Sealed Air, we wonder how much premium is in SEE for potential relevering relative to the weaker-rated Ashland?).
The late day pull-back in spreads and stocks pulled credit back more in line with intrinsics as credit remained that consistently 'over-priced' distance from equity/vol based context (remember our up-in-capital-structure views), we note that HY only outperformed LCDX by around 6bps today as the latter clung to the 350bps level despite some decent initial runs from the TOY deal. Anyone hanging on VIX's move today should remember that tomorrow is VIX option OPEX and also take a look at the AUDJPY vol of vol (the 1m vol of implied vol) relative to VIX for an idea of post OPEX reaction and note the huge steepness in the short-end of the vol curve (VIX/VXV at 85%!).
Movers in Detail
Spreads were tighter in the US as all the indices improved. IG trades 5.2bps tight (rich) to its 50d moving average, which is a Z-Score of -0.6s.d.. At 107bps, IG has closed tighter on 154 days in the last 419 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. HY trades 45.1bps wide (cheap) to its 50d moving average, which is a Z-Score of -0.7s.d. and at 563.1bps, HY has closed tighter on 91 days in the last 419 trading days (JAN09).
Indices generally outperformed intrinsics with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but narrowed the skew, ExHVOL outperformed pushing the skew wider, HY outperformed pushing the skew wider.
Comparing the relative HY and IG moves to their 50-day rolling beta, we see that HY underperformed by around 2.6bps (or 15%). Interestingly, based on short-run empirical betas between IG, HY, and the S&P, stocks outperformed HY by an equivalent 0.1bps (~ 0%), and stocks underperformed IG by an equivalent 0.3bps (~ 9%) - (implying IG underperformed HY (on an equity-adjusted basis)).
The names having the largest impact on IG are Anadarko Petroleum Corp. (-15bps) pushing IG 0.11bps tighter, and Nordstrom Inc. (+2bps) adding 0.02bps to IG. HVOL is more sensitive with SLM Corp pushing it 0.35bps tighter, and Home Depot Inc. contributing 0bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Anadarko Petroleum Corp. (-15bps) pushing the index 0.14bps tighter, and Nordstrom Inc. (+2bps) adding 0.02bps to ExHVOL.
The price of investment grade credit rose 0.16% to around 99.7% of par, while the price of high yield credits rose 0.66% to around 97.5% of par. ABX market prices are higher (improving) by 0.3% of par or in absolute terms, 0.9%. Volatility (VIX) is down -1.77pts to 24.33%, with 10Y TSY selling off (yield rising) 7bps to 2.64% and the 2s10s curve steepened by 5.4bps, as the cost of protection on US Treasuries fell 2bps to 46.25bps. 2Y swap spreads tightened 1bps to 19.5bps, as the TED Spread tightened by 0.8bps to 0.2% and Libor-OIS improved 1.5bps to 17.5bps.
The Dollar weakened with DXY falling 0.38% to 82.218, Oil rising $0.24 to $75.48 (underperforming the dollar as the value of Oil (rebased to the value of gold) rose by 0.32% today (a 0.06% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $0 to $1225.15 as the S&P rallies (1089.4 1.14%) outperforming IG credits (107bps 0.16%) while IG, which opened tighter at 108.75bps, underperforms HY credits. IG13 and XOver13 are -3.5bps and -25bps respectively while ITRX13 is -6.13bps to 109.25bps.
Dispersion fell -2bps 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 increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.
33% of IG credits are shifting by more than 3bps and 51% of the CDX universe are also shifting significantly (more than the 5 day average of 43%). The number of names wider than the index increased by 2 to 54 as the day's range rose to 3.25bps (one-week average 3.23bps), between low bid at 105.75 and high offer at 109 and higher beta credits (-1.98%) outperformed lower beta credits (-1.96%).
In IG, tighteners outpaced wideners by around 10-to-1, with 10 credits wider. By sector, CONS saw 11% names wider, ENRGs 6% names wider, FINLs 5% names wider, INDUs 11% names wider, and TMTs 4% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG exFINLs) with the former trading at 104.59bps and the latter at 101.66bps.
Cross Market, we are seeing the HY-XOver spread decompressing to 73.1bps from 65.26bps, but remains above the short-term average of 64.99bps, with the HY/XOver ratio rising to 1.15x, above its 5-day mean of 1.13x. The IG-Main spread decompressed to -2.25bps from -4.63bps, and remains above the short-term average of -3.07bps, with the IG/Main ratio rising to 0.98x, above its 5-day mean of 0.97x. Among the HY names, we see higher risk names (>500bps) outperforming lower risk (<500bps) names. In the IG names, we see higher beta names underperforming lower beta names.
In the US, non-financials underperformed financials as IG ExFINLs are tighter by 1.9bps to 101.7bps, with 81 of the 106 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 4.53bps to 127.26bps, with Finance names (worst) tighter by 10.29bps to 399.14bps, Banks (best) tighter by 5.08bps to 119.42bps, and Brokers tighter by 5.67bps to 175.67bps. Monolines are trading tighter on average by -27.77bps (1.75%) to 2518.44bps.
In IG, FINLs outperformed non-FINLs (2.88% tighter to 1.84% tighter respectively), with the former (IG FINLs) tighter by 4.9bps to 164.3bps, with 18 of the 19 names tighter. The IG CDS market (as per CDX) is -8.1bps rich (we'd expect LQD to outperform TLH) to the LQD-TLH-implied valuation of investment grade credit (115.09bps), with the bond ETFs underperforming the IG CDS market by around 0.83bps.
In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 5.62bps to 104.59bps (with ITRX FINLs -trading sideways- better by 8.18 to 127.88bps) and is currently trading in the middle of the week's range at 37.28%, between 110.21 to 101.25bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading tight to its week's range at 24.58%, between 98.37 to 90.5bps. ExHVOL underperformed LoVOL as the differential decompressed to -2.17bps from -4.75bps, and remains above the short-term average of -3.1bps. The Main exFINLS to IG ExHVOL differential compressed to 14.33bps from 16.59bps, and remains below the short-term average of 14.63bps.
The Emerging Market index is 1.9% less risky (4.8bps tighter) to 242.5bps. EM (Trend Wider) is currently trading at the wides of the week's range at 76.71%, between 247.2 to 226.9bps. The HY-EM spread compressed to 320.63bps from 333.02bps, and remains below the short-term average of 328.14bps, with the HY/EM ratio falling to 2.32x, below its 5-day mean of 2.37x.
CDR LQD 50 NAIG -2.55bps to 99.78 (3 wider - 42 tighter <> 32 steeper - 18 flatter).
CDR Counterparty Risk Index fell 4.53bps (-3.44%) to 127.26bps (0 wider - 14 tighter).
CDR Government Risk Index fell 5.43bps (-5.21%) to 98.68bps..
CDX14 IG -3.75bps to 107 ($0.16 to $99.7) (FV -2.34bps to 110.98) (10 wider - 100 tighter <> 69 steeper - 56 flatter) - No Trend.
CDX14 HVOL -5bps to 160 (FV -3.74bps to 0) (0 wider - 27 tighter <> 19 steeper - 11 flatter) - No Trend.
CDX14 ExHVOL -3.36bps to 90.26 (FV -1.91bps to 91.86) (10 wider - 85 tighter <> 45 steeper - 50 flatter).
CDX14 HY (30% recovery) Px $+0.66 to $97.5 / -17.2bps to 563.1 (FV -13.96bps to 587.01) (4 wider - 94 tighter <> 76 steeper - 23 flatter) - No Trend.
LCDX14 (70% recovery) Px $+0.37 to $96.25 / -10.49bps to 350.71 - No Trend.
MCDX14 -0.58bps to 225.42bps. - No Trend.
ITRX13 Main -6.13bps to 109.25bps (FV-3.47bps to 112.92bps).
ITRX13 Xover -25bps to 490bps (FV-14.31bps to 487.74bps).
ITRX13 FINLs -8.18bps to 127.88bps (FV-4.71bps to 131.73bps).
DXY weakened 0.36% to 82.23.
Oil rose $0.53 to $75.77.
Gold fell $0.2 to $1224.95.
VIX fell 1.77pts to 24.33%.
10Y US Treasury yields rose 7bps to 2.64%.
S&P500 Futures gained 1.11% to 1089.1.
The biggest absolute movers in IG were Nordstrom Inc. (+2.25bps), Altria Group Inc (+2bps), and Lowe`s Companies, Inc. (+1.5bps) in the underperformers, and Anadarko Petroleum Corp. (-15bps), SLM Corp (-12.48bps), and Hartford Financial Services Group (-12bps) in the outperformers. The biggest percentage movers in IG were Honeywell International Inc (+2.35%), Lowe`s Companies, Inc. (+1.95%), and Nordstrom Inc. (+1.78%) in the underperformers, and ConocoPhillips (-7.48%), Marsh & McLennan Companies, Inc. (-5.28%), and Dominion Resources, Inc. (-5.1%) in the outperformers.
In the more financial-heavy CDR NAIG LQD 50 index, sentiment is bullish with 3 wider to 42 tighter, and 32 steeper to 18 flatter as 2 of the 50 credits have inverted curves. The biggest absolute movers were Nordstrom Inc. (+2bps), Lowe`s Companies, Inc. (+1.5bps), and Safeway Inc. (+0.5bps) in the underperformers, and HSBC Finance Corporation (-12bps), General Electric Capital Corp (-8bps), and GATX Corporation (-7bps) in the outperformers. The biggest percentage movers in the CDR NAIG LQD 50 were Lowe`s Companies, Inc. (+1.95%), Nordstrom Inc. (+1.58%), and Safeway Inc. (+0.49%) in the underperformers, and HSBC Finance Corporation (-6.86%), Capital One Financial Corp. (-5.11%), and Wells Fargo & Company (-4.78%) in the outperformers.
The biggest percentage movers in XOver were International Power Plc (+1.17%), Cognis GmbH (+1.09%), and Cable & Wireless Plc (0%) in the underperformers, and Nielsen Company/The (-9.99%), Wind Acquisition Finance S.p.A. (-6.67%), and Lafarge SA (-6.25%) in the outperformers.The largest absolute movers in XOver were International Power Plc (+1.83bps), Cognis GmbH (+0.7bps), and Cable & Wireless Plc (0bps) in the underperformers, and BCM Ireland Finance Ltd (-71.62bps), ONO Finance, PLC (-52.36bps), and Seat Pagine Gialle SpA (-47.87bps) in the outperformers.
In the names of the HY index, the biggest percentage movers were RRI Energy, Inc. (+0.9%), Standard-Pacific Corp (+0.71%), and RadioShack Corp (+0.43%) in the underperformers, and Freescale Semiconductor, Inc. (-9.08%), Georgia-Pacific LLC (-7.69%), and Dynegy Holdings Inc. (-6.9%) in the outperformers. The largest absolute movers in HY were RRI Energy, Inc. (+6.69bps), Standard-Pacific Corp (+3.72bps), and RadioShack Corp (+1.25bps) in the underperformers, and Freescale Semiconductor, Inc. (-109.77bps), Dynegy Holdings Inc. (-97.37bps), and MBIA Inc (-80.59bps) in the outperformers.
The CDR Counterparty Risk Index Series 2 (of brokers and banks) fell -4.53bps (or -3.44%) to 127.26bps. Dresdner Bank AG (-1.3bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Dresdner Bank AG (-1.4%) is the worst (relative) performer. Royal Bank of Scotland Group Plc (-6.05bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and BNP Paribas (-5.33%) is the best (relative) performer.
The CDR Aussie Index rose 0.63bps (or 0.61%) to 102.96bps. QBE Insurance Group Limited (3.64bps) is the worst (absolute) performerAmcor Limited (-1.25bps) is the best (absolute) performer, and Amcor Limited (-1.98%) is the best (relative) performer.
The CDR Asian Index fell -0.77bps (or -0.68%) to 111.1bps. Acom Co Ltd (5bps) is the worst (absolute) performer, whilst Fujitsu Limited (2.85%) is the worst (relative) performer. ICICI Bank Limited (-4.32bps) is the best (absolute) performer, and Sumitomo Mitsui Banking Corp (-3.94%) is the best (relative) performer.