Daily Credit Summary: July 28 - Down Day
Spreads were broadly wider in the US (for the first time in over a week) as all the indices deteriorated. Indices typically underperformed single-names (but IG and HY both made wider tights and wider wides than yesterday) with skews widening in general as IG underperformed but narrowed the skew, HVOL underperformed but narrowed the skew, ExHVOL outperformed pushing the skew wider, XO's skew increased as the index outperformed, and HY's skew widened as it underperformed.
The names having the largest impact on IG are General Electric Capital Corp (-30bps) pushing IG 0.22bps tighter, and CIT Group Inc (+141.91bps joined with ABK which was 13pts wider on huge CDS losses which dragged the rest of the tail names wider) adding 0.55bps to IG. HVOL is more sensitive with General Electric Capital Corp pushing it 1bps tighter, and CIT Group Inc contributing 2.43bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Aetna Inc (-7bps) pushing the index 0.07bps tighter, and Valero Energy Corp. (+27bps) adding 0.27bps to ExHVOL.
The price of investment grade credit fell 0.08% to around 99.33% of par, while the price of high yield credits fell 0.19% to around 88.5% of par. ABX market prices are lower by 0.01% of par or in absolute terms, 0.79%. Broadly speaking, CMBX market prices are lower by 0.22% of par or in absolute terms, 0.05%. Volatility (VIX) is up 0.73pts to 25.01%, with 10Y TSY rallying (yield falling) 3.7bps to 3.69% and the 2s10s curve flattened by 7.8bps, as the cost of protection on US Treasuries rose 0.74bps to 29.75bps. 2Y swap spreads tightened 0.6bps to 40.69bps, as the TED Spread tightened by 0.2bps to 0.31% and Libor-OIS improved 0.7bps to 29.5bps.
The Dollar strengthened with DXY rising 0.32% to 78.876, Oil falling $1.11 to $67.27 (underperforming the dollar as the value of Oil (rebased to the value of gold) rose by 0.09% today (a 1.3% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $16.34 to $937.5 as the S&P is down (976 -0.4%) underperforming IG credits (116bps -0.08%) while IG, which opened wider at 116.75bps, outperforms HY credits. IG11 and XOver11 are +2bps and +20bps respectively while ITRX11 is +4.13bps to 95.38bps.
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 rose +11.4bps 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.
Only 30% of IG credits are shifting by more than 3bps and 43% of the CDX universe are also shifting significantly (less than the 5 day average of 52%). The number of names wider than the index decreased by 1 to 39 as the day's range fell to 4bps (one-week average 5.05bps), between low bid at 115 and high offer at 119 and higher beta credits (-0.09%) outperformed lower beta credits (1.05%).
In IG, wideners outpaced tighteners by around 3-to-2, with 57 credits notably wider. By sector, CONS saw 41% names wider, ENRGs 63% names wider, FINLs 52% names wider, INDUs 43% names wider, and TMTs 39% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 97.73bps and the latter at 93.32bps.
Cross Market, we are seeing the HY-XOver spread compressing to 171.72bps from 185.71bps, but remains below the short-term average of 201.73bps, with the HY/XOver ratio falling to 1.26x, below its 5-day mean of 1.31x. The IG-Main spread compressed to 20.62bps from 22.75bps, but remains below the short-term average of 22.81bps, with the IG/Main ratio falling to 1.22x, below its 5-day mean of 1.24x.
In the US, non-financials outperformed financials as IG ExFINLs are wider by 0.2bps to 93.3bps, with 45 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 1.56bps to 116.89bps, with Finance names (worst) wider by 40.76bps to 918.32bps, Banks (best) wider by 0.75bps to 162.79bps, and Brokers wider by 1.56bps to 138.95bps. Monolines are trading wider on average by 1657.94bps (57.75%) to 4043.66bps.
In IG, FINLs underperformed non-FINLs (1.71% wider to 0.22% wider respectively), with the former (IG FINLs) wider by 5.5bps to 329.4bps, with 7 of the 21 names tighter. The IG CDS market (as per CDX) is 29.4bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (86.58bps), with the bond ETFs underperforming the IG CDS market by around 0.24bps.
In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 4.07bps to 97.73bps (with ITRX FINLs -trending tighter- weaker by 4.37 to 86bps) and is currently trading in the middle of the week's range at 47.22%, between 102.28 to 93.66bps, and is trending tighter. Main LoVOL (sideways trading) is currently trading at the wides of the week's range at 77.69%, between 69.97 to 63.38bps. ExHVOL outperformed LoVOL as the differential compressed to -12.18bps from -7.17bps, and remains below the short-term average of -9.17bps. The Main exFINLS to IG ExHVOL differential decompressed to 41.41bps from 37.45bps, and remains above the short-term average of 39.96bps.
Commentary compliments of www.creditresearch.com
CDR LQD 50 NAIG091 +3.01bps to 142.13 (26 wider - 17 tighter <> 22 steeper - 26 flatter).
CDX12 IG +2bps to 116 ($-0.08 to $99.33) (FV +1.05bps to 130.59) (57 wider - 52 tighter <> 56 steeper - 68 flatter) - Trend Tighter.
CDX12 HVOL +8bps to 305 (FV +2.85bps to 357.84) (11 wider - 16 tighter <> 10 steeper - 20 flatter) - Trend Tighter.
CDX12 ExHVOL +0.11bps to 56.32 (FV +0.53bps to 67.49) (46 wider - 49 tighter <> 49 steeper - 46 flatter).
CDX11 XO +0.8bps to 321.4 (FV +1.15bps to 391.36) (15 wider - 11 tighter <> 17 steeper - 14 flatter) - Trend Tighter.
CDX12 HY (30% recovery) Px $-0.19 to $88.5 / +6bps to 826.2 (FV +2.86bps to 771.2) (59 wider - 23 tighter <> 29 steeper - 57 flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $-0.18 to $89.8 / +6.48bps to 561.09 - Trend Tighter.
MCDX12 +3bps to 163bps. - Trend Tighter.
CDR Counterparty Risk Index rose 1.56bps (1.35%) to 116.89bps (10 wider - 4 tighter).
CDR Government Risk Index fell 0.45bps (-1%) to 44.52bps..
DXY strengthened 0.32% to 78.88.
Oil fell $1.11 to $67.27.
Gold fell $16.34 to $937.5.
VIX increased 0.73pts to 25.01%.
10Y US Treasury yields fell 3.7bps to 3.69%.
S&P500 Futures lost 0.4% to 976.