Daily Credit Summary: February 3 - Meme De Jour/Millennium: Sovereign Risk
Sovereign risk was once again front and center on the minds of investors today. Despite the EU's efforts to 'back' Greece's cost cutting plans, investors remain far less sanguine than Almunia. Greek bonds managed a small 7bps rally relative to Bunds (which widened 2bps) as CDS were around 9bps wider (compressing the basis a little more). Don't read too much into the small rally in bonds (the basis remains wide at 55-60bps and we suspect given the convergence today that some are putting the trade on).
Spreads were mixed in the US with IG unch, HVOL wider, ExHVOL weaker, and HY rallying. IG trades 1.5bps wide (cheap) to its 50d moving average, which is a Z-Score of 0.2s.d.. At 92.25bps, IG has closed tighter on 30 days in the last 282 trading days (JAN09). The last five days have seen IG flat to its 50d moving average.
Indices typically underperformed single-names with skews mostly narrower as IG underperformed but narrowed the skew, HVOL outperformed but widened the skew, ExHVOL intrinsics beat and narrowed the skew, HY outperformed but narrowed the skew.
Only 4.8% of names in IG moved more than their historical vol would imply as higher vol names underperformed lower vol names by -0.45% to -0.55%. IG's vol is around 4.38% per 1 day period, which leaves 97 names higher vol and 28 lower vol than the index.
The names having the largest impact on IG are International Lease Finance Corp. (-8.11bps) pushing IG 0.06bps tighter, and Alcoa Inc. (+16.25bps) adding 0.13bps to IG. HVOL is more sensitive with International Lease Finance Corp. pushing it 0.24bps tighter, and Alcoa Inc. contributing 0.57bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both National Rural Utilities Cooperative Finance Corporation (-6bps) pushing the index 0.06bps tighter, and Southwest Airlines Co. (+5bps) adding 0.05bps to ExHVOL.
The price of investment grade credit was unch at around 100.33% of par, while the price of high yield credits rose 0.4712% to around 98.28% of par. ABX market prices are lower by 0.01% of par or in absolute terms, 0.19%. Volatility (VIX) is up 0.14pts to 21.62%, with 10Y TSY selling off (yield rising) 6.1bps to 3.7% and the 2s10s curve steepened by 3.7bps, as the cost of protection on US Treasuries rose 1bps to 47bps. 2Y swap spreads tightened 0.1bps to 28.24bps, as the TED Spread tightened by 0.3bps to 0.16% and Libor-OIS improved 0.5bps to 9.6bps.
The Dollar strengthened with DXY rising 0.49% to 79.401, Oil falling $0.25 to $76.98 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 0.09% today (a 0.17% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $4.62 to $1109.83 as the S&P is down (1094 -0.29%) underperforming IG credits (92.25bps 0%) while IG, which opened wider at 92.5bps, underperforms HY credits. IG11 and XOver11 are -0.5bps and -7bps respectively while ITRX11 is -0.25bps to 81.5bps.
Dispersion fell -0.3bps 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 12% of IG credits are shifting by more than 3bps and 28% of the CDX universe are also shifting significantly (less than the 5 day average of 35%). The number of names wider than the index decreased by 2 to 45 as the day's range fell to 2.5bps (one-week average 3.65bps), between low bid at 90.5 and high offer at 93 and higher beta credits (-0.45%) underperformed lower beta credits (-0.5%).
In IG, tighteners outpaced wideners by around 2-to-1, with 33 credits wider. By sector, CONS saw 29% names wider, ENRGs 24% names wider, FINLs 25% names wider, INDUs 23% names wider, and TMTs 29% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG13 exFINLs) with the former trading at 79.38bps and the latter at 80.69bps.
Cross Market, we are seeing the HY-XOver spread compressing to 103.21bps from 108.61bps, but remains below the short-term average of 113.43bps, with the HY/XOver ratio falling to 1.23x, below its 5-day mean of 1.25x. The IG-Main spread decompressed to 10.75bps from 10.5bps, but remains below the short-term average of 12.25bps, with the IG/Main ratio rising to 1.13x, below its 5-day mean of 1.15x. Among the HY names, we see higher risk names (>500bps) outperforming lower risk (<500bps) names. In the IG names, we see higher beta names marginally underperforming lower beta names as we closed.
In the US, non-financials outperformed financials as IG ExFINLs are tighter by 0.1bps to 80.7bps, with 54 of the 105 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 0.03bps to 101.47bps, with Banks (worst) wider by 0.92bps to 112bps, Brokers (best) tighter by 2.17bps to 121.83bps, and Finance names tighter by 12.23bps to 410.03bps. Monolines are trading wider on average by 199.61bps (5.05%) to 3145.93bps.
In IG, FINLs (thanks to ILFC/AIG/and GECC) outperformed non-FINLs (0.6% tighter to 0.18% tighter respectively), with the former (IG FINLs) tighter by 1bps to 159.2bps, with 11 of the 20 names tighter. The IG CDS market (as per CDX) is 17.5bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (74.77bps), with the bond ETFs outperforming the IG CDS market by around 3.46bps.
In Europe, ITRX Main ex-FINLs (outperforming FINLs) rallied 0.81bps to 79.38bps (with ITRX FINLs -trading sideways- weaker by 2 to 90bps) and is currently trading tight to its week's range at 0%, between 82.29 to 79.38bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading in the middle of the week's range at 44.56%, between 72.83 to 69.74bps. ExHVOL outperformed LoVOL as the differential compressed to -1.84bps from -1.66bps, but remains below the short-term average of -0.49bps. The Main exFINLS to IG ExHVOL differential compressed to 10.1bps from 10.91bps, but remains above the short-term average of 9.86bps.
The Emerging Market index is 2.4% riskier (6.1bps wider) to 260.6bps. EM12 (Trend Tighter) is currently trading in the middle of the week's range at 55.89%, between 265.4 to 254.5bps. The HY-EM spread compressed to 283.62bps from 302.12bps, but remains below the short-term average of 306.24bps, with the HY/EM ratio falling to 2.09x, below its 5-day mean of 2.18x.
Commentary courtesy of www.creditresearch.com
CDR LQD 50 NAIG +0.03bps to 83.97 (17 wider - 24 tighter <> 14 steeper - 34 flatter).
CDX13 IG -0.25bps to 92 ($0.01 to $100.34) (FV -0.28bps to 93.1) (33 wider - 67 tighter <> 52 steeper - 70 flatter) - Trend Tighter.
CDX13 HVOL 0bps to 165 (FV +0.21bps to 165.72) (10 wider - 15 tighter <> 10 steeper - 20 flatter) - Trend Tighter.
CDX13 ExHVOL -0.33bps to 68.95 (FV -0.45bps to 70.75) (23 wider - 72 tighter <> 53 steeper - 42 flatter).
CDX13 HY (30% recovery) Px $+0.47 to $98.28125 / -12.4bps to 544.2 (FV -5.72bps to 533.92) (26 wider - 62 tighter <> 41 steeper - 56 flatter) - Trend Tighter.
ITRX12 Main -0.37bps to 81.38 (FV -0.26bps to 83.6) (35 wider - 80 tighter <> 24 steeper - 101 flatter) - No Trend
ITRX12 HiVol -1.5bps to 114.5 (FV -2.16bps to 115.23) (6 wider - 24 tighter <> 6 steeper - 24 flatter) - No Trend
ITRX12 LoVol -0.01bps to 70.92 (FV +0.33bps to 73.74) (29 wider - 66 tighter <> 77 steeper - 18 flatter) - Sideways Trading
ITRX12 XOver -6.5bps to 441.5 (FV -12.31bps to 463.72) (3 wider - 39 tighter <> 17 steeper - 28 flatter) - Trend Tighter
LCDX12 (65% recovery) Px $+0.19 to $103.63 / -5.25bps to 444.27 - Trend Tighter.
MCDX12 +1.5bps to 167.5bps. - No Trend.
CDR Counterparty Risk Index rose 0.03bps (0.03%) to 101.47bps (9 wider - 5 tighter).
CDR Government Risk Index rose 4.21bps (5.27%) to 84.14bps..
DXY strengthened 0.49% to 79.4.
Oil fell $0.31 to $76.92.
Gold fell $4.62 to $1109.83.
VIX increased 0.15pts to 21.63%.
10Y US Treasury yields rose 5.9bps to 3.7%.
S&P500 Futures lost 0.27% to 1094.2.
Within the 240 name CDX Index Universe, sentiment is more bullish, with 61 (26%) wideners to 137 (58%) tighteners and 97 (41%) steepeners to 135 (57%) flatteners (2.2 tighteners for every widener). Among this universe, there are 18 credits with a bullish trend, and 3 with a bearish trend (based on the previous five days trading action).
The market's general sentiment is evident as we note that 16 credits are at the widest in their 5-day range currently, and 130 are at their tightest. Notably, from the 240 name index universe, there are 30 (~13%) credits that have inverted curves, with an average inversion of 40% of 5Y CDS.
Within the IG universe, dispersion overall has fallen -0.3bps to 88bps, as the wings of the distribution (10-90%) increased less than the centre (25-75%) of the distribution. The distribution shifted non-linearly as the 75th percentile increased the most (1.8bps /1.58%) to 112.3bps, and the 10th percentile increased the least (-0.8bps /-1.85%) to 42.5bps.
Breakeven analysis shows that the IG13 5s10s steepener, at 29.13bps carry, covers 8.72bps of flattening/inversion or 0.6 defaults over the next year. The indices themselves have very different breakevens with ITRX8 covering 4.1 defaults over its remaining life, and one year's carry covers 25.34bps widening (36%) or 1.5 defaults. XOver8=> 9.4 contract defaults, with 174.91bps widening (39%) or 3.7 defaults covered by one-year carry. ITRX12=> 7.6 contract defaults, with 17.85bps widening (22%) or 1.7 defaults covered by one-year carry. XOver12=> 14.5 contract defaults, with 112.04bps widening (25%) or 3.7 defaults covered by one-year carry. IG9 5Y=> 6.3 contract defaults, with 41.29bps widening (37%) or 2.3 defaults covered by one-year carry. IG9 7Y=> 11.5 contract defaults, with 29.78bps widening (23%) or 2.6 defaults covered by one-year carry. IG9 10Y=> 17 contract defaults, with 20.7bps widening (16%) or 2.7 defaults covered by one-year carry. IG13 5Y=> 8.5 contract defaults, with 20.85bps widening (23%) or 1.9 defaults covered by one-year carry. IG13 7Y=> 11.2 contract defaults, with 15.71bps widening (17%) or 1.9 defaults covered by one-year carry. IG13 10Y=> 17.4 contract defaults, with 14.55bps widening (13%) or 2.3 defaults covered by one-year carry. ExHVOL13=> 4.9 contract defaults, with 15.48bps widening (22%) or 1.1 defaults covered by one-year carry. HVOL13=> 3.6 contract defaults, with 38.65bps widening (23%) or 0.8 defaults covered by one-year carry. HY13=> 29.4 contract defaults, with 142.32bps widening (26%) or 7.7 defaults covered by one-year carry. LCDX12=> 40.2 contract defaults, with 138.79bps widening (31%) or 12.6 defaults covered by one-year carry.
IG Sector Moves and Betas
In IG, INDU (the worst sector) under-performed IG, moving (on average) 0bps (0.29%) wider to an average of 80bps. CONS (the second weakest sector) under-performed IG, moving (on average) 0.1bps (0.23%) tighter to an average of 76.5bps. TMT (the median sector) under-performed IG, moving (on average) 0bps (0.26%) tighter to an average of 90.4bps. FINL (the second best sector) out-performed IG, moving (on average) 0.1bps (0.39%) tighter to an average of 166.9bps. ENRG (the best sector) out-performed IG, moving (on average) 0.1bps (1.23%) tighter to an average of 79.8bps.
From the top-down, index capital structure changes shifted divergent as credit beats equity. The sectors were mixed with CONS (divergent as credit beats equity), ENRG (divergent as credit beats equity), FINL (divergent as credit beats equity), INDU (equity beating credit as they both deteriorate), and TMT (divergent as credit beats equity).
CDX-based regression betas indicate that INDU (1.2x) have the highest beta and ENRG (0.73x) the lowest, with TMT (1.1x), FINL (0.95x), and CONS (0.94x) in between. Comparing the regression betas to current level betas we see that INDU (0.23x rich) is the richest sector, while FINL (-0.8x cheap) is the cheapest, with CONS (0.18x rich), TMT (0.08x rich), and ENRG (0.08x rich) trading more in line.
Focusing on intra-sector movements within IG, we notice dispersion increasing the most in INDU which shifted 6.52% to 51.3bps, and the least in TMT which shifted -1.34% to 41.1bps,
Index Relative-Value and Key Levels
Across index credit quality, we saw HVOL move against its lack of trend relative to IG from a ratio of 1.79x to 1.79x, and HVOL also moved closer to IG and further from IG as it trades with its trend tighter now at 20.9% of the XO-IG difference, down from 50.5%. ExHVOL13 is currently trading tight to its week's range at -0.09%, between 72.04 to 68.95bps.HY shifted tighter relative to IG, against its trend wider, now at 5.92x, down from 6.03x yesterday. The HY-LCDX spread compressed to 99.95bps from 107.1bps, but remains below the short-term average of 113.5bps, with the HY/LCDX ratio falling to 1.22x, below its 5-day mean of 1.25x. The IG-MCDX differential compressed to -75.5bps from -73.75bps, but remains below the short-term average of -73.38bps, with the IG/MCDX ratio falling to 0.55x, below its 5-day mean of 0.56x. The HY-IG differential compressed to 452.21bps from 464.36bps, but remains below the short-term average of 471.47bps, with the HY/IG ratio falling to 5.92x, below its 5-day mean of 5.99x.
Both IG and HY are below (tighter than) their opening levels today with HY's range of 21.46bps above the week's average range multiple of 6.89x IG's range, at 8.58x. HY13 is currently trading tight to its week's range at 11.07%, between 590.94 to 538.4bps. IG13 is currently trading tight to its week's range at 18.75%, between 98.5 to 90.5bps.
Our pivot point analysis suggests intraday resistance at 94.56bps in IG, and breaking support at 90.87bps or resistance at 94.37bps as significant, with the index trend bullish (based on pivot point moving average changes), shifting tighter by 0.85bps per day over the last few days. On a short-term basis (based on the last 5 days trading), we see 93.69bps as a critical pivot point with 95.88bps, 100.69bps, and 105.5bps as important resistance levels, and 88.88bps, 86.69bps, and 81.88bps as important support levels. The short-term 'protection' relative strength indicator on IG moved from stable to strongly oversold at 24%.
Our pivot point analysis suggests intraday resistance at 570.4bps in HY, and breaking support at 546.77bps or resistance at 576.15bps as significant, with the index trend bullish (based on pivot point moving average changes), shifting tighter by 3.19bps per day over the last few days. On a short-term basis (based on the last 5 days trading), we see 564.1bps as a critical pivot point for HY with 575.97bps, 602.82bps, and 629.66bps as important resistance levels, and 537.26bps, 525.38bps, and 498.54bps as important support levels.On a short-term basis (based on the last 5 days trading), we see 564.1bps as a critical pivot point for HY with 575.97bps, 602.82bps, and 629.66bps as important resistance levels, and 537.26bps, 525.38bps, and 498.54bps as important support levels.
Today's biggest absolute movers in IG were Alcoa Inc. (+16.25bps), Ryder System Inc. (+13.5bps), and Hartford Financial Services Group (+6bps) in the wideners, and International Lease Finance Corp. (-8.11bps), National Rural Utilities Cooperative Finance Corporation (-6bps), and Toll Brothers, Inc. (-5bps) in the tighteners. Today's biggest percentage movers in IG were Ryder System Inc. (+11.59%), Pfizer Inc. (+7.45%), and Alcoa Inc. (+6.6%) in the wideners, and Goodrich Corp (-6.06%), Northrop Grumman Corp (-5.58%), and Sherwin-Williams Company/The (-4.94%) in the tighteners.
Today's biggest absolute movers in Main were Banco Espirito Santo SA (+29bps), Portugal Telecom International Finance B.V. (+15.75bps), and Telecom Italia SpA (+12bps) in the wideners, and ArcelorMittal (-12.5bps), Glencore International AG (-8bps), and Anglo American Plc (-7.5bps) in the tighteners. Today's biggest percentage movers in Main were Banco Espirito Santo SA (+16.96%), Portugal Telecom International Finance B.V. (+14.48%), and Telecom Italia SpA (+10.57%) in the wideners, and Safeway Ltd (-6.79%), ArcelorMittal (-5.81%), and Anglo American Plc (-5.64%) in the tighteners.
In the names of the XOver index, today's biggest percentage movers were Cable & Wireless Plc (+4.85%), Kabel Deutschland GmbH (+4.6%), and Havas SA (+1.8%) in the wideners, and Seat Pagine Gialle SpA (-12.12%), ThyssenKrupp AG (-6.73%), and NXP b.v. (-6.11%) in the tighteners. The largest absolute movers in XOver were Kabel Deutschland GmbH (+20bps), Cable & Wireless Plc (+15.95bps), and Havas SA (+3.75bps) in the wideners, and Seat Pagine Gialle SpA (-219.82bps), NXP b.v. (-83.73bps), and M-real Oyj (-48.83bps) in the tighteners.
In the names of the HY index, today's biggest percentage movers were MGM Mirage Inc (+2.89%), McClatchy Co./The (+2.73%), and K Hovnanian Enterprises, Inc. (+2.59%) in the wideners, and Energy Future Holdings Corp. (-8.08%), Eastman Kodak Co. (-7.22%), and Belo Corp (-5.96%) in the tighteners. The largest absolute movers in HY were MGM Mirage Inc (+27.18bps), McClatchy Co./The (+25.56bps), and K Hovnanian Enterprises, Inc. (+25.37bps) in the wideners, and Energy Future Holdings Corp. (-125.69bps), Eastman Kodak Co. (-65.99bps), and Boyd Gaming Corporation (-52.83bps) in the tighteners.
The CDR Counterparty Risk Index Series 2 (of brokers and banks) rose 0.03bps (or 0.03%) to 101.47bps. Citigroup Inc (3bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst BNP Paribas (2.76%) is the worst (relative) performer. Goldman Sachs Group Inc (-4bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and Goldman Sachs Group Inc (-3.38%) is the best (relative) performer.
The CDR Aussie Index fell -0.68bps (or -0.82%) to 82.52bps. Qantas Airways Ltd (1bps) is the worst (absolute) performer, whilst Qantas Airways Ltd (0.81%) is the worst (relative) performer. Wesfarmers Limited (-3bps) is the best (absolute) performer, and Wesfarmers Limited (-3.23%) is the best (relative) performer.
The CDR Asian Index fell -1.83bps (or -1.65%) to 109.05bps. State Bank of India (5.79bps) is the worst (absolute) performer, whilst State Bank of India (4.27%) is the worst (relative) performer. Acom Co Ltd (-15bps) is the best (absolute) performer, and Nissan Motor Co Ltd (-7.1%) is the best (relative) performer.