Daily Credit Summary: July 30 - Whither The Facts
Spreads were tighter in the US as all the indices improved (though leaking wider most of the day from a gap tight open, albeit with HY closing below 800bps). Indices typically underperformed single-names with skews mostly narrower (and this is becoming critical as IG is in mid single-digits and HY skew is very tight - perhaps signaling some room for HY-IG decompression or just single-name protection buying hedged via the index) as IG underperformed but narrowed the skew, HVOL underperformed but narrowed the skew, ExHVOL intrinsics beat and narrowed the skew, XO underperformed but compressed the skew, and HY's skew widened as it underperformed.
The names having the largest impact on IG are General Electric Capital Corp (-40bps) pushing IG 0.3bps tighter, and CIT Group Inc (+39.67bps) adding 0.15bps to IG. HVOL is more sensitive with General Electric Capital Corp pushing it 1.34bps tighter, and CIT Group Inc contributing 0.65bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Valero Energy Corp. (-12bps) pushing the index 0.12bps tighter, and National Rural Utilities Cooperative Finance Corporation (+5.5bps) adding 0.05bps to ExHVOL.
The price of investment grade credit rose 0.12% to around 99.46% of par, while the price of high yield credits rose 0.7475% to around 89.69% of par (intraday peak of $90.1875 or 773bps). ABX market prices are higher (improving) by 0.47% of par or in absolute terms, 0.99%. Broadly speaking, CMBX market prices are higher (improving) by 0.56% of par or in absolute terms, 0.15%. Volatility (VIX) is down -0.21pts to 25.4%, with 10Y TSY rallying (yield falling) 5.1bps to 3.61% and the 2s10s curve flattened by 5.9bps, as the cost of protection on US Treasuries fell 4.64bps to 26.5bps. 2Y swap spreads widened 1.4bps to 37bps, as the TED Spread tightened by 0.2bps to 0.31% and Libor-OIS improved 0.7bps to 28.4bps.
The Dollar weakened with DXY falling 0.39% to 79.322, Oil rising $3.39 to $66.74 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 4.89% today (a 4.96% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $4.13 to $934.13 as the S&P rallies (982 0.73%) outperforming IG credits (113bps 0.12%) while IG, which opened tighter at 111.75bps, underperforms HY credits (note that HY/IG fell below 7x for the first time in months today). IG11 and XOver11 are -0.95bps and -31.5bps respectively while ITRX11 is -6.5bps to 87.75bps.
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), although the IG curve flattened modestly and intrinsics were flatter in 5s7s (even with considerable 2s7s flattening in TSY land).
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.
58% of IG credits are shifting by more than 3bps and 63% of the CDX universe are also shifting significantly (more than the 5 day average of 50%). The number of names wider than the index decreased by 1 to 38 as the day's range rose to 6.25bps (one-week average 4.7bps), between low bid at 110 and high offer at 116.25 and higher beta credits (-5.15%) underperformed lower beta credits (-5.24%).
In IG, wideners were outpaced by tighteners by around 9-to-1, with only 9 credits notably wider. By sector, CONS saw 8% names wider, ENRGs 19% names wider, FINLs 10% names wider, INDUs 0% names wider, and TMTs 4% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 90.44bps and the latter at 87.31bps.
Cross Market, we are seeing the HY-XOver spread decompressing to 167.02bps from 158.79bps, but remains below the short-term average of 179.71bps, with the HY/XOver ratio rising to 1.27x, below its 5-day mean of 1.28x. The IG-Main spread decompressed to 25.25bps from 21.5bps, and remains above the short-term average of 22.88bps, with the IG/Main ratio rising to 1.29x, above its 5-day mean of 1.25x.
In the US, non-financials underperformed financials as IG ExFINLs are tighter by 5bps to 87.3bps, with 90 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 7.28bps to 107.37bps, with Banks (worst) tighter by 7.54bps to 147.9bps, Brokers (best) tighter by 7.44bps to 126.51bps, and Finance names tighter by 15.74bps to 909.73bps. Monolines are trading tighter on average by -405.08bps (5.79%) to 3949.33bps. (The most notable shifts today were in the major banks and brokers as the combination of Barney's Bill, ICE EUR cleaing, and HIG earnings seemed to see counterparty risk managers lifting hedges on mst major CDS names - banks/brokers/monolines/insurers - FINLs have majorly outperformed non-financials in the last week or so in iTraxx and in the US).
In IG12 (which lacks the major banks/brokers but contains CIT), FINLs underperformed non-FINLs (2.68% tighter to 5.39% tighter respectively), with the former (IG FINLs) tighter by 8.5bps to 310.9bps, with 16 of the 21 names tighter. The IG CDS market (as per CDX) is 27.9bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (85.08bps), with the bond ETFs underperforming the IG CDS market by around 3.63bps.
In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 6bps to 90.44bps (with ITRX FINLs -trending tighter- better by 8.5 to 77bps) and is currently trading tight to its week's range at 0%, between 97.69 to 90.44bps, and is trending tighter. Main LoVOL (sideways trading) is currently trading tight to its week's range at 5.88%, between 68.33 to 63.38bps. ExHVOL underperformed LoVOL as the differential decompressed to -4.99bps from -9.05bps, and remains above the short-term average of -8.67bps. The Main exFINLS to IG ExHVOL differential compressed to 31.76bps from 37.3bps, but remains below the short-term average of 37.99bps.
Commentary compliments of www.creditresearch.com
CDR LQD 50 NAIG091 -7.67bps to 133.29 (3 wider - 44 tighter <> 30 steeper - 18 flatter).
CDX12 IG -2.75bps to 113 ($0.12 to $99.46) (FV -5.67bps to 119.6) (9 wider - 106 tighter <> 69 steeper - 56 flatter) - No Trend.
CDX12 HVOL -10bps to 285 (FV -14.9bps to 325.03) (2 wider - 28 tighter <> 18 steeper - 12 flatter) - Trend Tighter.
CDX12 ExHVOL -0.46bps to 58.68 (FV -2.97bps to 63.84) (7 wider - 88 tighter <> 44 steeper - 51 flatter).
CDX11 XO -8.8bps to 308.4 (FV -13.01bps to 376.4) (1 wider - 32 tighter <> 22 steeper - 11 flatter) - Trend Tighter.
CDX12 HY (30% recovery) Px $+0.75 to $89.6875 / -23.3bps to 789 (FV -25.47bps to 740.59) (12 wider - 79 tighter <> 71 steeper - 21 flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $+0.75 to $90.3 / -26.61bps to 530.86 - Trend Tighter.
MCDX12 -5bps to 160bps. - No Trend.
CDR Counterparty Risk Index fell 7.12bps (-6.21%) to 107.53bps (0 wider - 14 tighter).
CDR Government Risk Index fell 2.37bps (-5.25%) to 42.7bps..
DXY weakened 0.39% to 79.32.
Oil rose $3.39 to $66.74.
Gold rose $4.13 to $934.13.
VIX fell 0.21pts to 25.4%.
10Y US Treasury yields fell 4.7bps to 3.62%.
S&P500 Futures gained 0.73% to 982.