Daily Credit Summary: August 24 - Schwing Day
Spreads were mixed in the US with IG unch, HVOL improving, ExHVOL weaker, XO stronger, and HY rallying (as we note all the indices ended well off their tights and did not partake of the swings we saw in equity land today). Indices typically underperformed single-names with skews widening in general (although we do note a significant tendency for off-the-run IG-HY decompression relative to IG12-HY12 compression and roll compression in ExHVOL's curve) as IG underperformed but narrowed the skew, HVOL outperformed but widened the skew, ExHVOL intrinsics beat and 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 (-109bps) pushing IG 0.44bps tighter, and Nordstrom Inc. (+5bps) adding 0.04bps to IG. HVOL is more sensitive with CIT Group Inc pushing it 1.92bps tighter, and Nordstrom Inc. contributing 0.17bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Dell Inc. (-6.75bps) pushing the index 0.07bps tighter, and Constellation Energy Group Inc. (+4.69bps) adding 0.05bps to ExHVOL.
The price of investment grade credit rose 0.01% to around 99.38% of par, while the price of high yield credits rose 0.37% to around 89.5% of par. ABX market prices are higher (improving) by 0.04% of par or in absolute terms, 0.13%. Broadly speaking, CMBX market prices are higher (improving) by 0.18% of par or in absolute terms, 0.04%. Volatility (VIX) is up 0.13pts to 25.14%, with 10Y TSY rallying (yield falling) 9.5bps to 3.47% and the 2s10s curve flattened by 2.1bps, as the cost of protection on US Treasuries fell 0.5bps to 23.5bps. 2Y swap spreads tightened 2.3bps to 41.38bps, as the TED Spread tightened by 0.7bps to 0.23% and Libor-OIS deteriorated 0.1bps to 20.3bps.
The Dollar strengthened with DXY rising 0.24% to 78.229, Oil rising $0.18 to $74.07 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 1.56% today (a 0.48% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $12.35 to $941.5 as the S&P is down (1024 -0.12%) underperforming IG credits (115bps 0.01%) while IG, which opened tighter at 112.5bps, underperforms HY credits. IG11 and XOver11 are +3.5bps and -21.32bps respectively while ITRX11 is -3.44bps to 88.75bps.
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), and additionally the ratio has dropped below 0.9x which is exceptionally bearish for stocks and spreads.
Dispersion fell -11.4bps 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 increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.
Only 34% of IG credits are shifting by more than 3bps and 46% of the CDX universe are also shifting significantly (less than the 5 day average of 50%). The number of names wider than the index decreased by 2 to 43 as the day's range fell to 4.88bps (one-week average 6.08bps), between low bid at 111 and high offer at 115.88 and higher beta credits (-1.96%) outperformed lower beta credits (-1.32%).
In IG, wideners were outpaced by tighteners by around 3-to-1, with 34 credits notably wider. By sector, CONS saw 43% names wider, ENRGs 31% names wider, FINLs 29% names wider, INDUs 21% names wider, and TMTs 4% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 89.56bps and the latter at 94.9bps.
Cross Market, we are seeing the HY-XOver spread decompressing to 211.17bps from 201.3bps, but remains below the short-term average of 215.13bps, with the HY/XOver ratio rising to 1.36x, above its 5-day mean of 1.35x. The IG-Main spread decompressed to 26.25bps from 22.81bps, but remains above the short-term average of 22.73bps, with the IG/Main ratio rising to 1.3x, above its 5-day mean of 1.24x.
In the US, non-financials underperformed financials as IG ExFINLs are tighter by 1.4bps to 94.9bps, with 67 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 2.44bps to 120.47bps, with Brokers (worst) wider by 0.63bps to 148.08bps, Finance names (best) tighter by 23.41bps to 881.57bps, and Banks tighter by 0.46bps to 155.15bps. Monolines are trading wider on average by 148.41bps (0.41%) to 4038.53bps.
In IG, FINLs outperformed non-FINLs (3.24% tighter to 1.41% tighter respectively), with the former (IG FINLs) tighter by 9.5bps to 283bps, with 15 of the 21 names tighter. The IG CDS market (as per CDX) is 23.7bps cheap (from 29bps cheap on Friday) - (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (91.26bps), with the bond ETFs underperforming the IG CDS market by around 2.24bps.
In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 2.96bps to 89.56bps (with ITRX FINLs -trending tighter- better by 5.37 to 85.5bps) and is currently trading tight to its week's range at 0%, between 102.66 to 89.56bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at -0.03%, between 73 to 64.2bps. ExHVOL underperformed LoVOL as the differential decompressed to 5.01bps from 0.52bps, but remains above the short-term average of 0.41bps. The Main exFINLS to IG ExHVOL differential compressed to 20.35bps from 26.27bps, but remains below the short-term average of 27.29bps.
Commentary compliments of www.creditresearch.com
CDR LQD 50 NAIG -0.58bps to 98.67 (20 wider - 28 tighter <> 18 steeper - 32 flatter).
CDX12 IG 0bps to 115 ($0.01 to $99.38) (FV -2.66bps to 125.06) (34 wider - 82 tighter <> 53 steeper - 69 flatter) - Trend Tighter.
CDX12 HVOL -9.38bps to 260 (FV -9bps to 314.52) (5 wider - 24 tighter <> 14 steeper - 16 flatter) - Trend Tighter.
CDX12 ExHVOL +2.96bps to 69.21 (FV -0.8bps to 71.32) (29 wider - 66 tighter <> 56 steeper - 39 flatter).
CDX11 XO -2.5bps to 302 (FV -1.94bps to 346.8) (12 wider - 20 tighter <> 15 steeper - 19 flatter) - Trend Tighter.
CDX12 HY (30% recovery) Px $+0.37 to $89.5 / -11.4bps to 794.2 (FV -12.61bps to 742.05) (18 wider - 72 tighter <> 58 steeper - 34 flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $-0.28 to $93.8 / +10.78bps to 709.87 - Trend Tighter.
MCDX12 -2bps to 138bps. - Trend Tighter.
CDR Counterparty Risk Index fell 2.44bps (-1.98%) to 120.47bps (5 wider - 9 tighter).
CDR Government Risk Index fell 3.08bps (-6.74%) to 42.53bps..
DXY strengthened 0.24% to 78.23.
Oil rose $0.18 to $74.07.
Gold fell $12.35 to $941.5.
VIX increased 0.13pts to 25.14%.
10Y US Treasury yields fell 9.5bps to 3.47%.
S&P500 Futures lost 0.12% to 1024.