Daily Credit Summary: July 21 - Risk Off, Risk On!

Spreads were mostly tighter in the US with HY outperforming IG and only
HVOL (dominated by CIT) wider close-to-close (although all the indices
were wider open-to-close as the morning's derisking gave way to
rerisking in ther afternoon). Indices generally outperformed intrinsics
(as we suspect correlation desks were actively covering between index
and single-name hedges and off-the-runs outperformed on-the-runs) 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 underperformed but compressed the skew, and
HY's skew widened as it underperformed (but HY made new contract tights
below 900bps).

The names having the largest impact on IG are
Metlife, Inc. (-47.5bps) pushing IG 0.38bps tighter, and CIT Group Inc
(+586.03bps) adding 2.2bps to IG. HVOL is more sensitive with Metlife,
Inc. pushing it 1.7bps tighter, and CIT Group Inc contributing 9.88bps
to HVOL's change today. The less volatile ExHVOL's move today is driven
by both Deere & Co. (-15bps) pushing the index 0.16bps tighter, and
Capital One Bank (+5bps) adding 0.05bps to ExHVOL.

The price
of investment grade credit rose 0.11% to around 99.05% of par, while
the price of high yield credits rose 0.34% to around 86.34% of par. ABX
market prices are higher (improving) by 0.13% of par or in absolute
terms, 0.04%. Broadly speaking, CMBX market prices are higher
(improving) by 1.63% of par or in absolute terms, 0.48%. Volatility
(VIX) is down -0.53pts to 23.87%, with 10Y TSY rallying (yield falling)
12.2bps to 3.49% and the 2s10s curve flattened by 6.5bps, as the cost
of protection on US Treasuries fell 0.76bps to 35bps. 2Y swap spreads
tightened 3.8bps to 43.25bps, as the TED Spread tightened by 1.9bps to
0.32% and Libor-OIS deteriorated 0.2bps to 30.9bps.

The Dollar
weakened with DXY falling 0.08% to 78.841, Oil rising $0.74 to $64.72
(outperforming the dollar as the value of Oil (rebased to the value of
gold) rose by 1.13% today (a 1.08% rise in the relative (dollar
adjusted) value of a barrel of oil), and Gold increasing $0.25 to
$948.95 as the S&P rallies (952.4 0.36%) outperforming IG credits
(122.5bps 0.11%) while IG, which opened tighter at 123bps,
underperforms HY credits. IG11 and XOver11 are -2.94bps and -15bps
respectively while ITRX11 is -2.62bps to 100.38bps.

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
rose +39.6bps 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.

58% of IG credits are shifting by more than 3bps and
62% of the CDX universe are also shifting significantly (more than the
5 day average of 60%). The number of names wider than the index stayed
at 41 as the day's range rose to 5.5bps (one-week average 6.25bps),
between low bid at 120 and high offer at 125.5 and higher beta credits
(-2.41%) underperformed lower beta credits (-4.75%).

In IG,
wideners were outpaced by tighteners by around 8-to-1, with only 10
credits notably wider. By sector, CONS saw 11% names wider, ENRGs 6%
names wider, FINLs 19% names wider, INDUs 0% names wider, and TMTs 4%
names wider. Focusing on non-financials, Europe (ITRX Main exFINLS)
underperformed US (IG12 exFINLs) with the former trading at 101.85bps
and the latter at 103.55bps.

Cross Market, we are seeing the
HY-XOver spread decompressing to 230.02bps from 226.28bps, but remains
above the short-term average of 226.11bps, with the HY/XOver ratio
rising to 1.35x, above its 5-day mean of 1.32x. The IG-Main spread
compressed to 22.12bps from 22.13bps, but remains above the short-term
average of 21.06bps, with the IG/Main ratio rising to 1.22x, above its
5-day mean of 1.19x.

In the US, non-financials outperformed
financials as IG ExFINLs are tighter by 4.1bps to 103.6bps, with 88 of
the 104 names tighter. while among US Financials, the CDR Counterparty
Risk Index fell 2.13bps to 125.34bps, with Finance names (worst) wider
by 70.17bps to 895.39bps, Brokers (best) tighter by 0.75bps to
142.08bps, and Banks wider by 2.21bps to 171.54bps. Monolines are
trading tighter on average by -28.31bps (0.78%) to 2627.31bps.

In
IG, FINLs underperformed non-FINLs (2.45% wider to 3.81% tighter
respectively), with the former (IG FINLs) wider by 8.3bps to 347.4bps,
with 17 of the 21 names tighter. The IG CDS market (as per CDX) is
22.5bps cheap (we'd expect LQD to underperform TLH) to the
LQD-TLH-implied valuation of investment grade credit (99.95bps), with
the bond ETFs underperforming the IG CDS market by around 2.96bps.

In
Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 2.03bps to
101.85bps (with ITRX FINLs -trending tighter- better by 5 to 94.5bps)
and is currently trading tight to its week's range at 0%, between
116.94 to 101.85bps, and is trending tighter. Main LoVOL (trend
tighter) is currently trading tight to its week's range at 0%, between
82.8 to 69.71bps. ExHVOL outperformed LoVOL as the differential
compressed to -8.32bps from -7.91bps, but remains above the short-term
average of -8.65bps. The Main exFINLS to IG ExHVOL differential
decompressed to 40.46bps from 38.71bps, but remains below the
short-term average of 40.83bps.

Commentary compliments of www.creditresearch.com


Index/Intrinsics Changes

CDR LQD 50 NAIG091 -2.66bps to 149.5 (7 wider - 32 tighter <> 20 steeper - 29 flatter).
CDX12
IG -2.63bps to 122.5 ($0.11 to $99.05) (FV -2.18bps to 141.94) (11
wider - 103 tighter <> 66 steeper - 57 flatter) - Trend Tighter.
CDX12 HVOL +2bps to 317 (FV +1.27bps to 392.51) (4 wider - 25 tighter <> 14 steeper - 16 flatter) - Trend Tighter.
CDX12 ExHVOL -4.09bps to 61.08 (FV -3.16bps to 73.23) (7 wider - 88 tighter <> 43 steeper - 52 flatter).
CDX11 XO -10.7bps to 338 (FV -11.41bps to 419.53) (4 wider - 29 tighter <> 22 steeper - 12 flatter) - Trend Tighter.
CDX12
HY (30% recovery) Px $+0.31 to $86.31 / -10.2bps to 895.1 (FV -18.79bps
to 822.04) (14 wider - 78 tighter <> 60 steeper - 33 flatter) -
Trend Tighter.
LCDX12 (65% recovery) Px $+0.37 to $88 / -14.78bps to 635.48 - Trend Tighter.
MCDX12 -10bps to 170bps. - Trend Tighter.
CDR Counterparty Risk Index fell 1.79bps (-1.41%) to 125.67bps (6 wider - 8 tighter).
CDR Government Risk Index fell 2.61bps (-4.84%) to 51.39bps..
DXY weakened 0.08% to 78.84.
Oil rose $0.74 to $64.72.
Gold rose $0.25 to $948.95.
VIX fell 0.53pts to 23.87%.
10Y US Treasury yields fell 12.2bps to 3.49%.
S&P500 Futures gained 0.36% to 952.4.

Comments

[Anonymous]

dddd

[Danz Gambit]

Ron Paul's opening statement at today's hearing - good stuff

http://www.lewrockwell.com/blog/lewrw/archives/030548.html

[Anonymous]

Might as well get comfy.

[Anonymous]

http://www.finextra.com/fullstory.asp?id=20292

[convexity]

Tyler, I had never seen the convept of Vol term structure before I started reading your "daily credit summary".  I have tried to pull up VIVX on bbrg but to no avail.  I ssume the concept here is to build a vol vurve based on one minth vs 5 month VIX readings?  How can I find the 5 month VIX on BBRG? and do you know of any reserach on this topic of building a forward vol term structure.  I am very interested in backtesting this as a signal.  When I search VIVX on the net, All I see is ZH and others that repeat your quotes.