Daily Credit Summary: August 27 - No Rain, No Rainbows
Spreads were mixed in US credit today with most of the major indices as good as unch by the close but modestly nearer their tights than wides, much like the equity market. Less than 30% of single-names moved more than 3bps as liquidity was very low there although we did hear some 'more normal' two-way flow in IG and HY but certainly not in size as credit stuck in tight trading ranges in both. Breadth was negative in credit though as wideners outpaced tighteners and more curves flattened that steepened. As a side note, IG12 has closed within a 1.5bps range for the last 5 days and intraday peak-to-trough has been 4.5bps in the last four days!
Spreads were mixed in the US with IG tighter, HVOL improving, ExHVOL weaker, XO wider, and HY selling off (as intraday ranges were very small and credit underperformed equity on the day). Indices generally outperformed intrinsics (with single-name liquidity very low) with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew, ExHVOL outperformed pushing the skew wider, XO's skew increased as the index outperformed, and HY outperformed but narrowed the skew.
A tiny 8.8% of names in IG moved more than their historical vol would imply as higher vol names outperformed lower vol names by 0.86% to 1.5%. IG's vol is around 4.38% per 1 day period, which leaves 98 names higher vol and 27 lower vol than the index.
The names having the largest impact on IG are American International Group, Inc. (-78.3bps) pushing IG 0.49bps tighter, and International Lease Finance Corp. (+36.81bps) adding 0.25bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 2.17bps tighter, and International Lease Finance Corp. contributing 1.09bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both National Rural Utilities Cooperative Finance Corporation (-5bps) pushing the index 0.05bps tighter, and Constellation Energy Group Inc. (+12.5bps) adding 0.12bps to ExHVOL.
The price of investment grade credit rose 0.01% to around 99.4% of par, while the price of high yield credits fell 0.0675% to around 88.81% of par. ABX market prices are lower by 0.04% of par or in absolute terms, 0.96%. Broadly speaking, CMBX market prices are lower by 0.11% of par or in absolute terms, 0.03%. Volatility (VIX) is down -0.26pts to 24.68%, with 10Y TSY selling off (yield rising) 3.1bps to 3.47% and the 2s10s curve steepened by 3.1bps, as the cost of protection on US Treasuries rose 3bps to 25.5bps. 2Y swap spreads tightened 0.6bps to 34.88bps, as the TED Spread tightened by 0.6bps to 0.22% and Libor-OIS improved 0.8bps to 17.9bps.
The Dollar weakened with DXY falling 0.76% to 78.064, Oil rising $1.36 to $72.79 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 1.47% today (a 1.14% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $4 to $949.55 as the S&P rallies (1030 0.31%) outperforming IG credits (114.5bps 0.01%) while IG, which opened wider at 115.75bps, outperforms HY credits. IG11 and XOver11 are -1.42bps and +9.93bps respectively while ITRX11 is 0bps to 92bps.
The majority of credit curves steepened 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 1.3bps 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 22% of IG credits are shifting by more than 3bps and 32% of the CDX universe are also shifting significantly (less than the 5 day average of 40%). The number of names wider than the index stayed at 44 as the day's range rose to 4bps (one-week average 4.75bps), between low bid at 113 and high offer at 117 and higher beta credits (0.3%) outperformed lower beta credits (1.34%).
In IG, wideners outpaced tighteners by around 3-to-1, with 70 credits wider. By sector, CONS saw 73% names wider, ENRGs 75% names wider, FINLs 57% names wider, INDUs 61% names wider, and TMTs 9% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 93bps and the latter at 97.07bps.
Cross Market, we are seeing the HY-XOver spread compressing to 213.5bps from 221.24bps, but remains above the short-term average of 212.29bps, with the HY/XOver ratio falling to 1.35x, above its 5-day mean of 1.35x. The IG-Main spread compressed to 22.5bps from 22.63bps, but remains below the short-term average of 23.71bps, with the IG/Main ratio falling to 1.24x, below its 5-day mean of 1.26x.
In the US, non-financials underperformed financials as IG ExFINLs are wider by 0.6bps to 97.1bps, with 22 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 0.62bps to 118.65bps, with Brokers (worst) wider by 1.63bps to 147.7bps, Finance names (best) wider by 7.87bps to 893.87bps, and Banks wider by 1.25bps to 154.87bps. Monolines are trading tighter on average by 0bps (0%) to 4094.38bps.
In IG, FINLs outperformed non-FINLs (0.23% tighter to 0.66% wider respectively), with the former (IG FINLs) tighter by 0.7bps to 282.9bps, with 4 of the 21 names tighter. The IG CDS market (as per CDX) is 22.3bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (92.21bps), with the bond ETFs underperforming the IG CDS market by around 0.94bps.
In Europe, ITRX Main ex-FINLs (outperforming FINLs) rallied 0.45bps to 93bps (with ITRX FINLs -trading sideways- weaker by 1.79 to 88bps) and is currently trading in the middle of the week's range at 36.28%, between 98.83 to 89.68bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading in the middle of the week's range at 26.19%, between 69.93 to 64.32bps. ExHVOL underperformed LoVOL as the differential decompressed to 1.82bps from 1.49bps, but remains below the short-term average of 2.81bps. The Main exFINLS to IG ExHVOL differential compressed to 25.39bps from 26.31bps, but remains above the short-term average of 24.25bps.
Commentary compliments of www.creditresearch.com
CDR LQD 50 NAIG +0.91bps to 99.74 (29 wider - 9 tighter <> 23 steeper - 25 flatter).
CDX12 IG -0.13bps to 114.5 ($0.01 to $99.4) (FV +0.39bps to 126.85) (70 wider - 28 tighter <> 74 steeper - 49 flatter) - No Trend.
CDX12 HVOL -2bps to 263 (FV -1.29bps to 316.77) (16 wider - 10 tighter <> 19 steeper - 11 flatter) - No Trend.
CDX12 ExHVOL +0.46bps to 67.61 (FV +0.89bps to 73.3) (54 wider - 41 tighter <> 40 steeper - 55 flatter).
CDX11 XO +2.5bps to 308 (FV +3.56bps to 350.1) (23 wider - 6 tighter <> 13 steeper - 18 flatter) - Trend Wider.
CDX12 HY (30% recovery) Px $-0.07 to $88.8125 / +2.2bps to 815.2 (FV +5.78bps to 743.78) (57 wider - 25 tighter <> 31 steeper - 57 flatter) - Trend Wider.
LCDX12 (65% recovery) Px $+0.22 to $93.565 / -8.39bps to 718.74 - Trend Wider.
MCDX12 -1.5bps to 124.5bps. - Trend Tighter.
CDR Counterparty Risk Index rose 0.62bps (0.53%) to 118.65bps (8 wider - 6 tighter).
CDR Government Risk Index rose 1.01bps (2.34%) to 44.29bps..
DXY weakened 0.76% to 78.06.
Oil rose $1.36 to $72.79.
Gold rose $4 to $949.55.
VIX fell 0.25pts to 24.72%.
10Y US Treasury yields rose 3.1bps to 3.47%.
S&P500 Futures gained 0.24% to 1029.3.