Daily Credit Summary: December 14 - Du Buy Again? (IG13 At 91.25 bps)
Commentary courtesy of www.creditresearch.com
Spreads tightened notably today with HY outperforming IG and credit outperforming equity as Abu Dhabi's hail-mary provided support for the bulls systemically on a slow econ data day. Breadth was very positive with winners far outpacing wideners on the day as FINLs outperformed non-FINLs in credit-land but underperformed in equities.
IG intrinsics outperformed as HY intrinsics underperformed their respective indices today, suggesting the direction of the majority of trades over the past few months (see below) and while the overnight news cleared up some concerns the moves today (and recently) just seem to aggressive to be aggressive bullish positioning into year-end as opposed to thin-market-driven unwinds of hedged single-name and decompression trades. Since the series 13 roll, we note that ExHVOL13 (our preferred short vehicle) is the only index to be in the money (short-side) having widened almost 10bps (while costing only 3bps carry).
IG and HY managed to close pretty much at their tights with the former almost at YTD tights and the latter well into JUN08 levels for intrinsics. The S&P was unable to clamber back to its overnight highs (right after the Dubai announcement) but did close at 2009 highs with the 1085-1120 range of the last month holding better than the 95-110bps range in IG (as it closed at its lowest since 9/22).
US and EUR financials are compressing notably, which is a long-held view of ours, but as is sometimes the case, we are right for the wrong reasons as we suspected that EUR FINLs would underperform to US levels but we have seen US FINLs outperform to EUR levels in the last few weeks.
SovX was unimpressed by the Dubai news (not a member) and while Greece was 20bps wider today, UK, Portugal, Spain, and Austria also widened. Dubai (sovereign) did compress, as one would expect given the news, it remains around 425bps which is just less than the level at which it stood on 11/25 when the news broke and over 100bps wider than pre-crisis levels.
While IG closed near its tights and near 2009 tights, the intraday range was very narrow as HY13 nudged up over $97.5 and HY12x13 compressed modestly. Equity volumes were marginal at best (with Citi making up the most) and chatter with dealer clients suggested quiet index markets also with dealers marking down single-names trying to manage curves into the roll.
The components of IG13 show the expected performance of the worse performers from 9/21 to 11/30 are the best performers from 11/30 to now. This indirectly suggests the roll is pushing single-name shorts to unwind early and the dramatic outperformance of IG13 intrinsics relative to IG13 index since 11/30 helps to confirm this. The skew being now basically zero in IG13 provides some comfort for entry in the index (either way to be clear).
This skew compression is far more notable in HY13 where we have seen dramatic HY index performance over intrinsics as the skew moves to within 5-10bps (index a smidge cheap). The difference in the index vs intrinsics picture between HY and IG is even more notable when you look at performance across ratings. From 9/21 to 11/30, we saw a notable reach for yield among investors with the lowest credit quality names significantly outperforming the highest quality credits (both in absolute and relative performance space). Very noticeably though since 11/30 (and coincidentally the divergence between FINLs and the broad equity market), we have seen higher quality credits outperform as the up-in-quality trade sees a resurgence with rising TSY yields and sovereign uncertainty.
We have seen the disconnect between debt and equity markets increase dramatically from both the bottom-up and top-down. Bottom-up, we have gone from 40% of CDS trading rich to equity-market perceptions at the start of DEC to more than 60% currently. Top-down, both IG and HY remain notably rich to the S&P 500 and its implied volatility curve. Given the roll, it would seem tough to profit from any bottom-up dislocation, but the indices are largely unaffected (even given the steepness of 3s5s curves) and we suggest a good look at buying IG (or HY) protection versus a long equity position (call for thoughts on deltas). If you are really adventurous, we would suggest selling Puts against the long protection to benefit from our short-term view that implied vol is high.
The calming (if not opaque) influence in the middle east did not help Greece as all eyes swung back to Europe. Despite Berlusconi's inability take a right cross, the Greek government is making a statement tonight on reducing deficits and staying in the EURO - certainly our Ireland vs Greece bet seems prescient as Ireland appeared to be jawboning (and actioning) some real changes while we are unsure of the outlook for Greece. Several Greek banks offer notable differentials over Greece sovereign risk and our sense would be that if you are bearish on the outlook for Greece then playing the bank vs Greece sovereign decompression makes a lot of sense (from a cheap carry perspective as well as convex contagion).
One other sovereign risk measure is the spread between EM and US HY risk. This differential has compressed to around 300bps recently and may be a useful guide for domestic vs non-domestic risk aversion - or perhaps just a guide to how US leveraged firms stack up with EM sovereigns. The HY-EM differential has not been this tight since DEC07 (aside from a spike in OCT08) and the ratio of HY/EM is dropping from a 2.5x 'norm' to 2.16x currently (at the peak of the crisis the ratio was around 1.5x and spike to almost 1.1x briefly). Notably, EM sovereign risk remains stuck around the 260bps level (index rich to intrinsics) which is around the same as JUL-AUG08, whereas HY has moved well through the 700bps levels of that period.
Today's biggest absolute movers in IG were Arrow Electronics Inc. (+2.25bps), AT&T Mobility LLC (+2bps), and Walt Disney Company/The (+1bps) in the wideners, and XTO Energy Inc (-58.35bps), International Lease Finance Corp. (-47.78bps), and American International Group, Inc. (-27.08bps) in the tighteners. Today's biggest percentage movers in IG were AT&T Mobility LLC (+5.63%), Arrow Electronics Inc. (+2.85%), and Walt Disney Company/The (+2.41%) in the wideners, and XTO Energy Inc (-73.07%), Anadarko Petroleum Corp. (-18.6%), and American Express Company (-11.9%) in the tighteners.
In the more financial-heavy CDR NAIG LQD 50 index, sentiment is bullish with 3 wider to 39 tighter, and 29 steeper to 19 flatter as 0 of the 50 credits have inverted curves. The biggest absolute movers were Hewlett-Packard Company (+2.25bps), Walt Disney Company/The (+1bps), and Time Warner Inc. (+0.5bps) in the wideners, and Citigroup Inc (-22.5bps), Morgan Stanley (-20.75bps), and General Electric Capital Corp (-18bps) in the tighteners. The biggest percentage movers in the CDR NAIG LQD 50 were Hewlett-Packard Company (+8.91%), Walt Disney Company/The (+2.41%), and Time Warner Inc. (+1%) in the wideners, and Morgan Stanley (-17.51%), JP Morgan Chase & Co. (-15.74%), and Citigroup Inc (-14.06%) in the tighteners.
In the names of the HY index, today's biggest percentage movers were Georgia-Pacific LLC (+1.06%), United Rentals North America, Inc. (+0.07%), and Windstream Corporation (0%) in the wideners, and Residential Capital, LLC (-10.45%), Forest Oil Corp. (-9.78%), and Celestica Inc. (-8.16%) in the tighteners. The largest absolute movers in HY were Georgia-Pacific LLC (+2.5bps), United Rentals North America, Inc. (+0.46bps), and Windstream Corporation (0bps) in the wideners, and Residential Capital, LLC (-221.35bps), McClatchy Co./The (-113.01bps), and Realogy Corporation (-92.12bps) in the tighteners.
Today's biggest absolute movers in Main were United Utilities Plc (+1bps), Electricite de France SA (+0.5bps), and STMicroelectronics N.V. (+0.37bps) in the wideners, and ArcelorMittal (-7.76bps), Glencore International AG (-5.08bps), and Volvo AB (-4.18bps) in the tighteners. Today's biggest percentage movers in Main were United Utilities Plc (+1.72%), Electricite de France SA (+1.33%), and STMicroelectronics N.V. (+0.68%) in the wideners, and Koninklijke DSM N.V. (-7.47%), JTI (UK) Finance PLC (-6.15%), and Groupe Danone (-5.17%) in the tighteners.
In the names of the XOver index, today's biggest percentage movers were Nordic Telephone Company Holding ApS (+1.32%), Infineon Technologies AG (+0.9%), and Norske Skogindustrier ASA (+0.02%) in the wideners, and NXP b.v. (-15.15%), Seat Pagine Gialle SpA (-10.67%), and Valeo SA (-5.43%) in the tighteners. The largest absolute movers in XOver were Infineon Technologies AG (+3.21bps), Nordic Telephone Company Holding ApS (+3bps), and Norske Skogindustrier ASA (+0.19bps) in the wideners, and NXP b.v. (-268.08bps), Seat Pagine Gialle SpA (-209.05bps), and M-real Oyj (-69.71bps) in the tighteners.
The CDR Counterparty Risk Index Series 2 (of brokers and banks) fell -6.38bps (or -7.03%) to 84.42bps. HSBC Bank PLC (-0.26bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst HSBC Bank PLC (-0.44%) is the worst (relative) performer. Citigroup Inc (-22.5bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and Morgan Stanley (-17.51%) is the best (relative) performer.
CDR LQD 50 NAIG -3.98bps to 76.8 (3 wider - 39 tighter <> 29 steeper - 19 flatter).
CDX13 IG -2.25bps to 91.25 ($0.1 to $100.38) (FV -4.01bps to 89.65) (4 wider - 108 tighter <> 59 steeper - 63 flatter) - Trend Tighter.
CDX13 HVOL -3bps to 160 (FV -6.84bps to 156.63) (0 wider - 27 tighter <> 14 steeper - 16 flatter) - Trend Tighter.
CDX13 ExHVOL -2.01bps to 69.54 (FV -3.13bps to 68.98) (4 wider - 91 tighter <> 50 steeper - 45 flatter).
CDX13 HY (30% recovery) Px $+0.95 to $97.5 / -25.4bps to 564.7 (FV -19.9bps to 553.9) (2 wider - 93 tighter <> 68 steeper - 31 flatter) - Trend Tighter.
ITRX12 Main -2bps to 79.5 (FV -1.73bps to 77.26) (6 wider - 117 tighter <> 40 steeper - 85 flatter) - No Trend
ITRX12 HiVol -2.79bps to 118.5 (FV -2.42bps to 116.2) (1 wider - 29 tighter <> 9 steeper - 21 flatter) - No Trend
ITRX12 LoVol -1.75bps to 67.18 (FV -1.52bps to 65.16) (5 wider - 90 tighter <> 64 steeper - 31 flatter) - Sideways Trading
ITRX12 XOver -9bps to 476 (FV -16.81bps to 493.35) (3 wider - 41 tighter <> 20 steeper - 25 flatter) - Trend Tighter
LCDX12 (65% recovery) Px $+0.81 to $101.46 / -24.22bps to 492.62 - Trend Tighter.
MCDX12 -0.5bps to 139.5bps. - No Trend.
CDR Counterparty Risk Index fell 6.38bps (-7.03%) to 84.42bps (0 wider - 14 tighter).
CDR Government Risk Index rose 0.48bps (0.83%) to 58.54bps..
DXY weakened 0.3% to 76.34.
Oil fell $0.16 to $69.71.
Gold rose $9.1 to $1124.5.
VIX fell 0.45pts to 21.11%.
10Y US Treasury yields is unchanged at 3.55%.