Daily Credit Summary: August 19 - Swiss And Sweet
Spreads widened in general today in the face of a surprisingly resilient US equity market as overnight saw more Asian angst and dollar doldrums. HY underperformed IG but both were wider as indices underperformed intrinsics and low beta underperformed high beta. Intraday ranges were wider than average in IG and HY today but both closed much nearer their wides than tights, as stocks closed at their highs. HY's resilience yesterday (following the AXL debacle) seems to have run its course with both IG and HY now wider on the week. IG and HY are both significantly wider than their Friday closes and Monday opens whereas the S&P seems modestly worse than Friday's close but considerably better than Monday's open - infer what you will.
Spreads were broadly wider in the US as all the indices deteriorated (with HY underperforming IG and both closing near their wides as opposed to equities near their highs). Indices typically underperformed single-names with skews mostly narrower as IG underperformed but narrowed the skew, HVOL underperformed but narrowed the skew, ExHVOL intrinsics beat and narrowed the skew, XO underperformed but compressed the skew, and HY's skew widened as it underperformed.
Only 21.6% of names in IG moved more than their historical vol would imply as higher vol names outperformed lower vol names by 1.44% to 2.02%. IG's vol is around 4.38% per 1 day period, which leaves 63 names higher vol and 62 lower vol than the index.
The names having the largest impact on IG are International Lease Finance Corp. (-82.87bps) pushing IG 0.56bps tighter, and General Electric Capital Corp (+15bps) adding 0.11bps to IG. HVOL is more sensitive with International Lease Finance Corp. pushing it 2.49bps tighter, and General Electric Capital Corp contributing 0.5bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Constellation Energy Group Inc. (-30.75bps) pushing the index 0.31bps tighter, and Cigna Corp (+12.5bps) adding 0.13bps to ExHVOL.
The price of investment grade credit fell 0.15% to around 99.03% of par, while the price of high yield credits fell 0.75% to around 87.5% of par. ABX market prices are lower by 0.11% of par or in absolute terms, 0.33%. Broadly speaking, CMBX market prices are higher (improving) by 0% of par or in absolute terms, 0%. Volatility (VIX) is up 0.08pts to 26.26%, with 10Y TSY rallying (yield falling) 5.8bps to 3.46% and the 2s10s curve flattened by 1.8bps, as the cost of protection on US Treasuries rose 1bps to 29bps. 2Y swap spreads tightened 0.8bps to 42.88bps, as the TED Spread widened by 1.4bps to 0.26% and Libor-OIS improved 0.3bps to 23.5bps.
The Dollar weakened with DXY falling 0.51% to 78.532, Oil rising $2.97 to $72.16 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 3.91% today (a 3.78% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $3.5 to $942.1 as the S&P rallies (996.2 0.67%) outperforming IG credits (123.5bps -0.15%) while IG, which opened tighter at 119.5bps, outperforms HY credits. IG11 and XOver11 are +1.01bps and +9bps respectively while ITRX11 is +2.25bps to 102.25bps.
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).
Dispersion fell -7.8bps 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 37% of IG credits are shifting by more than 3bps and 49% of the CDX universe are also shifting significantly (less than the 5 day average of 58%). The number of names wider than the index stayed at 44 as the day's range rose to 7.5bps (one-week average 5.65bps), between low bid at 119 and high offer at 126.5 and higher beta credits (1.02%) outperformed lower beta credits (2.07%).
In IG, wideners outpaced tighteners by around 3-to-1, with 80 credits wider. By sector, CONS saw 65% names wider, ENRGs 50% names wider, FINLs 43% names wider, INDUs 68% names wider, and TMTs 87% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 103.28bps and the latter at 101.09bps.
Cross Market, we are seeing the HY-XOver spread decompressing to 215.23bps from 200.39bps, and remains above the short-term average of 215.07bps, with the HY/XOver ratio rising to 1.34x, below its 5-day mean of 1.35x. The IG-Main spread decompressed to 21.25bps from 19.75bps, but remains below the short-term average of 21.9bps, with the IG/Main ratio rising to 1.21x, below its 5-day mean of 1.23x.
In the US, non-financials outperformed financials as IG ExFINLs are wider by 1.4bps to 101.1bps, with 20 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 4.36bps to 130.83bps, with Brokers (worst) wider by 5bps to 160.2bps, Banks (best) wider by 2.21bps to 167.4bps, and Finance names wider by 2.98bps to 920.38bps. Monolines are trading wider on average by 56.55bps (0.12%) to 4310.98bps.
In IG, FINLs (thanks to CIT and ILFC specifically) outperformed non-FINLs (1.17% tighter to 1.42% wider respectively), with the former (IG FINLs) tighter by 3.6bps to 302.6bps, with 8 of the 21 names tighter. The IG CDS market (as per CDX) is 27.4bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (96.08bps), with the bond ETFs outperforming the IG CDS market by around 2.8bps.
In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 2.28bps to 103.28bps (with ITRX FINLs -trending wider- weaker by 2.13 to 98.13bps) and is currently trading at the wides of the week's range at 100%, between 103.28 to 92bps, and is trending wider. Main LoVOL (trend wider) is currently trading at the wides of the week's range at 100.06%, between 73.43 to 66.24bps. ExHVOL underperformed LoVOL as the differential decompressed to -0.3bps from -3.73bps, and remains above the short-term average of -1.29bps. The Main exFINLS to IG ExHVOL differential compressed to 30.15bps from 31.73bps, but remains above the short-term average of 28.23bps.
The Emerging Market index is 1% riskier (3.4bps wider) to 334.2bps. EM10 (Trend Wider) is currently trading at the wides of the week's range at 86.75%, between 337.7 to 311.4bps. The HY-EM spread decompressed to 522.52bps from 502.11bps, and remains above the short-term average of 510.52bps, with the HY/EM ratio rising to 2.56x, below its 5-day mean of 2.57x.
Commentary compliments of www.creditresearch.com
CDR LQD 50 NAIG +2.85bps to 106.17 (38 wider - 6 tighter <> 21 steeper - 29 flatter).
CDX12 IG +3.75bps to 123.5 ($-0.15 to $99.03) (FV +0.62bps to 133.28) (80 wider - 28 tighter <> 69 steeper - 56 flatter) - Trend Wider.
CDX12 HVOL +3.39bps to 283 (FV -1.93bps to 337.01) (18 wider - 9 tighter <> 20 steeper - 10 flatter) - Trend Wider.
CDX12 ExHVOL +3.86bps to 73.13 (FV +1.35bps to 75.81) (62 wider - 33 tighter <> 46 steeper - 49 flatter).
CDX11 XO +4.6bps to 312.8 (FV +4.54bps to 361.35) (23 wider - 7 tighter <> 20 steeper - 13 flatter) - Trend Wider.
CDX12 HY (30% recovery) Px $-0.75 to $87.5 / +23.8bps to 856.7 (FV +1.77bps to 787.71) (59 wider - 33 tighter <> 47 steeper - 47 flatter) - Trend Wider.
LCDX12 (65% recovery) Px $-0.22 to $92.5 / +8.96bps to 761.18 - Trend Wider.
MCDX12 +0.5bps to 145bps. - No Trend.
CDR Counterparty Risk Index rose 4.36bps (3.44%) to 130.83bps (14 wider - 0 tighter).
CDR Government Risk Index rose 0.93bps (1.95%) to 48.73bps..
DXY weakened 0.51% to 78.53.
Oil rose $2.97 to $72.16.
Gold rose $3.5 to $942.1.
VIX increased 0.08pts to 26.26%.
10Y US Treasury yields fell 5.9bps to 3.45%.
S&P500 Futures gained 0.67% to 996.2.