Daily Credit Summary: January 13 Congressional Subpoena On Credit-Equity Divergence

Spreads were broadly wider in the US as all the indices deteriorated. IG trades 14.3bps tight (rich) to its 50d moving average, which is a Z-Score of -1.5s.d.. At 79.25bps, IG has closed tighter on only 5 days so far this year (268 trading days). The last five days have seen IG flat to its 50d moving average.

Indices generally outperformed intrinsics with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew, ExHVOL outperformed but narrowed the skew, HY outperformed but narrowed the skew.

40% of names in IG moved more than their historical vol would imply as higher vol names outperformed lower vol names by 4.14% to 4.68%. IG's vol is around 4.38% per 1 day period, which leaves 96 names higher vol and 29 lower vol than the index.

The names having the largest impact on IG are Boston Properties L.P. (-5bps) pushing IG 0.04bps tighter, and GATX Corporation (+11bps) adding 0.09bps to IG. HVOL is more sensitive with Boston Properties L.P. pushing it 0.17bps tighter, and GATX Corporation contributing 0.37bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Loews Corporation (-2bps) pushing the index 0.02bps tighter, and Constellation Energy Group Inc. (+8bps) adding 0.08bps to ExHVOL.

The price of investment grade credit fell 0.03% to around 100.89% of par, while the price of high yield credits fell 0.005% to around 100.63% of par. ABX market prices are higher (improving) by 0.01% of par or in absolute terms, 0.29%. Volatility (VIX) is down -0.4pts to 17.82%, with 10Y TSY selling off (yield rising) 7.4bps to 3.79% and the 2s10s curve steepened by 1.7bps, as the cost of protection on US Treasuries rose 0.5bps to 36bps. 2Y swap spreads tightened 1.2bps to 26.58bps, as the TED Spread tightened by 0.7bps to 0.21% and Libor-OIS improved 0.6bps to 10.4bps.

The Dollar weakened with DXY falling 0.13% to 76.853, Oil falling $1.14 to $79.65 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 2.26% today (a 1.54% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $9.83 to $1138.33 as the S&P rallies (1141.6 0.68%) outperforming IG credits (79.25bps -0.03%) while IG, which opened tighter at 78.5bps, underperforms HY credits. IG11 and XOver11 are +1.75bps and +10.5bps respectively while ITRX11 is +2.06bps to 70.25bps.

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 -0.1bps 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.

43% of IG credits are shifting by more than 3bps and 44% of the CDX universe are also shifting significantly (more than the 5 day average of 40%). The number of names wider than the index increased by 3 to 48 as the day's range fell to 3bps (one-week average 3.2bps), between low bid at 78 and high offer at 81 and higher beta credits (4.34%) underperformed lower beta credits (4.18%).

In IG, wideners outpaced tighteners by around 13-to-1, with 107 credits wider. By sector, CONS saw 92% names wider, ENRGs 94% names wider, FINLs 47% names wider, INDUs 96% names wider, and TMTs 92% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG13 exFINLs) with the former trading at 70.69bps and the latter at 69.53bps.

Cross Market, we are seeing the HY-XOver spread compressing to 74.73bps from 85.04bps, but remains below the short-term average of 87.58bps, with the HY/XOver ratio falling to 1.18x, below its 5-day mean of 1.22x. The IG-Main spread compressed to 9bps from 10.31bps, and remains below the short-term average of 10.24bps, with the IG/Main ratio falling to 1.13x, below its 5-day mean of 1.15x.

In the US, non-financials underperformed financials as IG ExFINLs are wider by 2.8bps to 69.5bps, with 0 of the 106 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 1.77bps to 82.66bps, with Finance names (worst) wider by 2.45bps to 388.75bps, Banks (best) wider by 0.25bps to 89bps, and Brokers wider by 0.5bps to 100.67bps. Monolines are trading wider on average by 69.7bps (1.77%) to 2490.63bps.

In IG, FINLs outperformed non-FINLs (0.69% wider to 4.19% wider respectively), with the former (IG FINLs) wider by 1bps to 140.3bps, with 8 of the 19 names tighter. The IG CDS market (as per CDX) is 12.7bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (66.55bps), with the bond ETFs outperforming the IG CDS market by around 2.58bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 2.01bps to 70.69bps (with ITRX FINLs -trading sideways- weaker by 2.25 to 68.5bps) and is currently trading at the wides of the week's range at 100%, between 70.69 to 65.75bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading at the wides of the week's range at 99.98%, between 61.33 to 56.64bps. ExHVOL outperformed LoVOL as the differential compressed to 0.95bps from 2.2bps, and remains below the short-term average of 2.14bps. The Main exFINLS to IG ExHVOL differential decompressed to 8.41bps from 6.76bps, but remains above the short-term average of 6.75bps.

The Emerging Market index is 1.2% riskier (2.8bps wider) to 229.9bps. EM12 (No Trend) is currently trading at the wides of the week's range at 75.31%, between 232.5 to 221.9bps. The HY-EM spread compressed to 254.34bps from 256.92bps, and remains below the short-term average of 254.87bps, with the HY/EM ratio falling to 2.11x, below its 5-day mean of 2.12x.

Commentary courtesy of www.creditresearch.com

Index/Intrinsics Changes

CDR LQD 50 NAIG +2.01bps to 71.02 (37 wider - 8 tighter <> 28 steeper - 21 flatter).
CDX13 IG +0.75bps to 79.25 ($-0.03 to $100.89) (FV +2.52bps to 80.15) (107 wider - 8 tighter <> 56 steeper - 67 flatter) - No Trend.
CDX13 HVOL +2bps to 133 (FV +2.56bps to 140.47) (22 wider - 4 tighter <> 12 steeper - 17 flatter) - No Trend.
CDX13 ExHVOL +0.36bps to 62.28 (FV +2.52bps to 61.49) (85 wider - 10 tighter <> 51 steeper - 44 flatter).
CDX13 HY (30% recovery) Px $0 to $100.625 / +0.2bps to 484.2 (FV +6.47bps to 478.53) (62 wider - 21 tighter <> 47 steeper - 51 flatter) - Trend Tighter.
ITRX12 Main +2.06bps to 70.25 (FV +3.13bps to 70.23) (122 wider - 1 tighter <> 67 steeper - 57 flatter) - No Trend
ITRX12 HiVol +3.5bps to 98.5 (FV +5.33bps to 100.76) (29 wider - 1 tighter <> 17 steeper - 12 flatter) - No Trend
ITRX12 LoVol +1.61bps to 61.33 (FV +2.44bps to 60.71) (93 wider - 2 tighter <> 45 steeper - 50 flatter) - Sideways Trading
ITRX12 XOver +10.5bps to 409.5 (FV +17.51bps to 431.59) (45 wider - 0 tighter <> 22 steeper - 23 flatter) - Trend Wider
LCDX12 (65% recovery) Px $-0.11 to $105.45 / +2.86bps to 383.62 - No Trend.
MCDX12 +1bps to 149bps. - Trend Wider.
CDR Counterparty Risk Index rose 1.77bps (2.19%) to 82.66bps (13 wider - 1 tighter).
CDR Government Risk Index rose 4.11bps (6.2%) to 70.36bps..
DXY weakened 0.13% to 76.85.
Oil fell $1.14 to $79.65.
Gold rose $9.83 to $1138.33.
VIX fell 0.4pts to 17.82%.
10Y US Treasury yields rose 7.6bps to 3.79%.
S&P500 Futures gained 0.68% to 1141.6.

Index Internals
Within the 240 name CDX Index Universe, sentiment is significantly bearish, with  181 (76%) wideners to 29 (12%) tighteners and 109 (46%) steepeners to 124 (52%) flatteners (6.2 wideners for every tightener). Among this universe, there are 2 credits with a bullish trend, and 40 with a bearish trend (based on the previous five days trading action).

The market's general sentiment is evident as we note that 174 credits are at the widest in their 5-day range currently, and 11 are at their tightest. Notably, from the 240 name index universe, there are 28 (~12%) credits that have inverted curves, with an average inversion of 33% of 5Y CDS.

Within the IG universe, dispersion overall has fallen -0.1bps to 81.1bps, as the wings of the distribution (10-90%) increased more than the centre (25-75%) of the distribution. The distribution shifted non-linearly as the 10th percentile increased the most (2bps /5.57%) to 37.9bps, and the 75th percentile increased the least (2.5bps /2.7%) to 95bps.

Breakeven analysis shows that the IG13 5s10s steepener, at 19.01bps carry, covers 6.95bps of flattening/inversion or 0.5 defaults over the next year. The indices themselves have very different breakevens with ITRX8 covering 3.3 defaults over its remaining life, and one year's carry covers 19.74bps widening (35%) or 1.2 defaults. XOver8=> 8.9 contract defaults, with 157.89bps widening (38%) or 3.4 defaults covered by one-year carry. ITRX12=> 6.7 contract defaults, with 15.32bps widening (22%) or 1.5 defaults covered by one-year carry. XOver12=> 13.7 contract defaults, with 101.97bps widening (25%) or 3.4 defaults covered by one-year carry. IG9 5Y=> 5.6 contract defaults, with 35.56bps widening (36%) or 2 defaults covered by one-year carry. IG9 7Y=> 10 contract defaults, with 25.4bps widening (23%) or 2.3 defaults covered by one-year carry. IG9 10Y=> 15.5 contract defaults, with 18.54bps widening (16%) or 2.4 defaults covered by one-year carry. IG13 5Y=> 7.4 contract defaults, with 17.74bps widening (22%) or 1.7 defaults covered by one-year carry. IG13 7Y=> 11.2 contract defaults, with 15.56bps widening (17%) or 1.9 defaults covered by one-year carry. IG13 10Y=> 16.4 contract defaults, with 13.53bps widening (13%) or 2.1 defaults covered by one-year carry. ExHVOL13=> 4.4 contract defaults, with 13.85bps widening (22%) or 1 defaults covered by one-year carry. HVOL13=> 3.1 contract defaults, with 32.21bps widening (23%) or 0.7 defaults covered by one-year carry. HY13=> 26.9 contract defaults, with 123.47bps widening (25%) or 6.8 defaults covered by one-year carry. LCDX12=> 36.2 contract defaults, with 115.05bps widening (30%) or 10.9 defaults covered by one-year carry.

IG Sector Moves and Betas
In IG, INDU (the worst sector) under-performed IG, moving (on average) 3.1bps (5.37%) wider to an average of 64.1bps. CONS (the second weakest sector) under-performed IG, moving (on average) 2.8bps (4.71%) wider to an average of 66.6bps. TMT (the median sector) under-performed IG, moving (on average) 2.7bps (4.65%) wider to an average of 78.2bps. ENRG (the second best sector) under-performed IG, moving (on average) 2.8bps (4.64%) wider to an average of 68.7bps. FINL (the best sector) under-performed IG, moving (on average) 1bps (1.25%) wider to an average of 147.4bps.

From the top-down, index capital structure changes shifted divergent as equity beats credit. The sectors were mixed with CONS (divergent as equity beats credit), ENRG (divergent as equity beats credit), FINL (divergent as equity beats credit), INDU (divergent as equity beats credit), and TMT (divergent as equity beats credit).

CDX-based regression betas indicate that INDU (1.2x) have the highest beta and ENRG (0.73x) the lowest, with TMT (1.1x), CONS (0.94x), and FINL (0.93x) in between. Comparing the regression betas to current level betas we see that INDU (0.27x rich) is the richest sector, while FINL (-0.85x cheap) is the cheapest, with CONS (0.17x rich), ENRG (0.09x rich), and TMT (0.07x rich) trading more in line.

Focusing on intra-sector movements within IG, we notice dispersion increasing the most in ENRG which shifted 3.31% to 38.2bps,  and the least in FINL which shifted -0.04% to 181.9bps,

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 1.67x to 1.68x, and HVOL also moved closer to XO and further from IG as it trades against its trend tighter now at 40.4% of the XO-IG difference, up from 40.1%. ExHVOL13 is currently trading at the wides of the week's range at 99.85%, between 62.28 to 59.87bps.HY shifted tighter relative to IG, with its trend tighter, now at 6.11x, down from 6.17x yesterday. The HY-LCDX spread compressed to 100.61bps from 103.28bps, and remains below the short-term average of 101.76bps, with the HY/LCDX ratio falling to 1.26x, below its 5-day mean of 1.27x. The IG-MCDX differential compressed to -69.75bps from -69.5bps, but remains below the short-term average of -60.97bps, with the IG/MCDX ratio rising to 0.53x, below its 5-day mean of 0.56x. The HY-IG differential compressed to 404.98bps from 405.54bps, and remains below the short-term average of 405.02bps, with the HY/IG ratio falling to 6.11x, below its 5-day mean of 6.21x.

Both IG and HY are above (wider than) their opening levels today with HY's range of 19.84bps above the week's average range multiple of 6.49x IG's range, at 6.61x. HY13 is currently trading in the middle of the week's range at 56.61%, between 499.87 to 463.82bps. IG13 is currently trading in the middle of the week's range at 65.38%, between 81.5 to 75bps.

Our pivot point analysis suggests intraday support at 77.31bps in IG, and breaking support at 75.12bps or resistance at 79.37bps as significant, with the index trend bearish (based on pivot point moving average changes), shifting tighter by 0.18bps per day over the last few days. On a short-term basis (based on the last 5 days trading), we see 78.38bps as a critical pivot point with 81.76bps, 84.88bps, and 88bps as important resistance levels, and 75.26bps, 71.88bps, and 68.76bps as important support levels. The short-term 'protection' relative strength indicator on IG moved slightly more overbought but remains stable at 61.8%.

Our pivot point analysis suggests intraday resistance at 480.6bps in HY, and breaking support at 461.37bps or resistance at 492.46bps as significant, with the index trend bearish (based on pivot point moving average changes), shifting tighter by 2.3bps per day over the last few days. On a short-term basis (based on the last 5 days trading), we see 482.94bps as a critical pivot point for HY with 502.06bps, 518.99bps, and 535.92bps as important resistance levels, and 466.01bps, 446.89bps, and 429.96bps as important support levels.On a short-term basis (based on the last 5 days trading), we see 482.94bps as a critical pivot point for HY with 502.06bps, 518.99bps, and 535.92bps as important resistance levels, and 466.01bps, 446.89bps, and 429.96bps as important support levels.

Single-Name Movers
Today's biggest absolute movers in IG were GATX Corporation (+11bps), Constellation Energy Group Inc. (+8bps), and Cigna Corp (+7.75bps) in the wideners, and Boston Properties L.P. (-5bps), Loews Corporation (-2bps), and Chubb Corp. (-1.5bps) in the tighteners. Today's biggest percentage movers in IG were Hewlett-Packard Company (+25.45%), International Business Machines Corp. (+16.39%), and Aetna Inc (+11.83%) in the wideners, and Boston Properties L.P. (-4.55%), Chubb Corp. (-3.37%), and Loews Corporation (-3.13%) in the tighteners.

In the more financial-heavy CDR NAIG LQD 50 index, sentiment is very bearish with 37 wider to 8 tighter, and 28 steeper to 21 flatter as 0 of the 50 credits have inverted curves. The biggest absolute movers were GATX Corporation (+11bps), Hewlett-Packard Company (+7bps), and Comcast Corp. (+5.25bps) in the wideners, and Berkshire Hathaway Inc (-2.75bps), HSBC Finance Corporation (-2.5bps), and Chubb Corp. (-1.5bps) in the tighteners. The biggest percentage movers in the CDR NAIG LQD 50 were Hewlett-Packard Company (+25.45%), International Business Machines Corp. (+16.39%), and GATX Corporation (+11.11%) in the wideners, and Chubb Corp. (-3.37%), HSBC Finance Corporation (-2.86%), and Berkshire Hathaway Inc (-1.95%) in the tighteners.

In XO11, today's biggest percentage movers were Boston Scientific Corp. (+13.22%), Jones Apparel Group Inc. (+8.03%), and Temple-Inland Inc. (+6.12%) in the wideners, and MGM Mirage Inc (-1.46%), Liberty Media LLC (-0.83%), and Belo Corp (-0.6%) in the tighteners. The largest absolute movers in XO11 were Liz Claiborne Inc. (+15.26bps), EL Paso Corp (+12.5bps), and Royal Caribbean Cruises Ltd (+12bps) in the wideners, and MGM Mirage Inc (-11.83bps), Liberty Media LLC (-2.5bps), and Belo Corp (-2bps) in the tighteners.

Today's biggest absolute movers in Main were Hellenic Telecommunications Organization SA (+17.25bps), WPP 2005 Limited (+15bps), and Bertelsmann AG (+14bps) in the wideners, and Alstom (-1bps), SABMiller plc (-0.25bps), and STMicroelectronics N.V. (0bps) in the tighteners. Today's biggest percentage movers in Main were Hellenic Telecommunications Organization SA (+17.74%), WPP 2005 Limited (+12.99%), and Hannover Rueckversicherung AG (+12.5%) in the wideners, and Alstom (-1.03%), SABMiller plc (-0.29%), and STMicroelectronics N.V. (0%) in the tighteners.

In the names of the XOver index, today's biggest percentage movers were Ineos Group Holdings plc (+12.9%), HeidelbergCement AG (+9.7%), and Virgin Media Finance PLC (+9.56%) in the wideners, and NXP b.v. (-2.15%), Thomson S.A. (0%), and Seat Pagine Gialle SpA (+0.67%) in the tighteners. The largest absolute movers in XOver were Ineos Group Holdings plc (+171.66bps), Norske Skogindustrier ASA (+73.81bps), and BCM Ireland Finance Ltd (+44.25bps) in the wideners, and NXP b.v. (-25.84bps), Thomson S.A. (0bps), and Wendel SA (+2.5bps) in the tighteners.

In the names of the HY index, today's biggest percentage movers were Textron Financial Corp (+9.8%), Clear Channel Communications Inc (+8.91%), and McClatchy Co./The (+7.72%) in the wideners, and Residential Capital, LLC (-9.23%), Boyd Gaming Corporation (-2.53%), and Qwest Capital Funding Inc (-2.33%) in the tighteners. The largest absolute movers in HY were Clear Channel Communications Inc (+108.24bps), AMR Corp (+72.67bps), and McClatchy Co./The (+64.85bps) in the wideners, and Residential Capital, LLC (-68.88bps), Boyd Gaming Corporation (-23.08bps), and Univision Communications Inc. (-15.26bps) in the tighteners.

The CDR Counterparty Risk Index Series 2 (of brokers and banks) rose 1.77bps (or 2.19%) to 82.66bps. Barclays Bank Plc (5bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Barclays Bank Plc (6.58%) is the worst (relative) performer. Merrill Lynch & Co., Inc. (-0.5bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and Merrill Lynch & Co., Inc. (-0.5%) is the best (relative) performer.

The CDR Aussie Index fell -0.21bps (or -0.3%) to 69.13bps. Macquarie Bank Limited (3.27bps) is the worst (absolute) performer, whilst RIO Tinto Ltd (2.74%) is the worst (relative) performer. Qantas Airways Ltd (-2.7bps) is the best (absolute) performer, and Telecom Corporation of New Zealand Limited (-5.46%) is the best (relative) performer.

The CDR Asian Index rose 0.14bps (or 0.16%) to 88.89bps. Shinhan Bank (10bps) is the worst (absolute) performer, whilst Shinhan Bank (10.87%) is the worst (relative) performer. Promise Co Ltd (-50.6bps) is the best (absolute) performer, and Sumitomo Corp (-9.09%) is the best (relative) performer.