Daily Credit Summary: June 10 - Credit Selling Into Strength?

Tyler Durden's picture

Commentrary courtesy of www.creditresearch.com

Spreads closed handily tighter at the index levels but underperformed dramatically at the single-name level with bonds also underperforming. The skew compression combined with what we think was single-name longs being unwound into the mild strength today does not support the almost 3% rise in stocks with credit sending very different messages on a broad-based level (especially in FINLs).

IG and HY saw inside range days today - tighter intraday wides than yesterday and wider intraday tights as both closed within a smidge of last Friday's closing level. It is notable, and supportive of our view of the cyclical macro hedge unwind to underlying long unwind theme that intrinsics (for IG and HY) are +10bps and +42bps since Friday's close - a very different picture - and with notable 3s5s flattening. Off the runs underperformed on-the-runs today in index/roll land and while high beta outperformed low beta, we do note the top-CDO referenced names underperforming the broad market slightly in 5Y and more so in 3Y.

There was little clear evidence of a theme to today's action aside from single-name underperformance with breadth slightly positive though we do note that A-rated credits tended to underperform and crossover much more mixed with an average gain/loss of around zero today. Energy and Finance sectors were worst performers while Consumer Cyclicals and Utilities were the outperformers. An interesting mix of higher beta recovery bets and lower beta safety bets today.

On a DV01-adjusted basis, Weatherford, MBIA, FSA, Baker Hughes, and Noble Corp were the worst performing credits in 5Y while ARM, MNI, FDC, Continental, TRW, FSL, and Aramark were the best performers (DV01-adjusted) of our US universe. HAL, Nabors, DO, Dynegy, and Forest Oil all saw significant widening today also (energy-related names). Of the Top CDO-referenced names, it was the widest spread names that underperformed the most and tight spread names that outperformed - leaving some tell-tale marks from correlation desks managing tail risk (as opposed to soaking it up). LBO screen names saw modest moves but at the aggregate we noted 3s5s flattening (pointing to some reduction in LBO risk premium).

This is interestingly the 3rd Thursday in a row we have seen stocks and credit put in a significant rally but we note IG and HY remain well above support from the averages, skews are better placed for any directional moves, and we see pivot support and resistance for IG and HY at 120.75/139.25 and 592/802 respectively. 127bps and 653bps are the pivot points for IG and HY.

Bottom line - while a 3% rally in stocks and the best performance day in IG and HY credit since 5/27 hide what we think is going on under the covers. Breadth was much more mixed in single-names and the unwinding of index overlays and single-name longs (bonds or CDS) that was evident today seem to signal a risk-off sentiment from the top-down (with technicals dominating index moves today). The increasing correlation (and again we are careful to avoid using the term dependence) between stocks, credit indices, and carry currency crosses appears to be getting tighter (with EURJPY and ES_F hardly leaving each other's side today) but for the third day in a row, stocks have outperformed credit.

By way of example, the S&P is 22pts above last Friday's close while HY and IG are unch to slightly wider (with Main and XOver wider). SovX and EU FINLs are tighter over that period, which perhaps explains the rally in stocks (reduction in systemic risk and contagion) but the impact has already occurred in our view as it has slooshed back to corporate spreads and liquidity, implying higher asset vol (business risk) and lower equity valuations. Our equity perspective issued this morning confirms this top-down and bottom-up view.

For those that care: British Sporting events this weekend offer some interesting spreading: Zero cost bet on Ireland Rugby points - New Zealand Rugby points - England Rugby Points + Australia Rugby Points - England Soccer goals + USA soccer goals. Perhaps we will see history (we expect so) when South Africa manage to be the first host nation to lose the opening match (vs. Mexico). Spain-England final won by England on penalties.

Movers in Detail
Spreads were mixed in the US with IG tighter, HVOL wider, ExHVOL better, and HY rallying. IG trades 22.7bps wide (cheap) to its 50d moving average, which is a Z-Score of 1.4s.d.. At 126bps, IG has closed tighter on 240 days in the last 372 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. HY trades 77.3bps wide (cheap) to its 50d moving average, which is a Z-Score of 1.3s.d. and at 673.25bps, HY has closed tighter on 166 days in the last 372 trading days (JAN09).

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

Comparing the relative HY and IG moves to their 50-day rolling beta, we see that HY outperformed by around 5.4bps (or 18%). Interestingly, based on short-run empirical betas between IG, HY, and the S&P, stocks outperformed HY by an equivalent 16.7bps (~ 55%), and stocks outperformed IG by an equivalent 3bps (~ 54%) - (implying IG underperformed HY (on an equity-adjusted basis)).

The names having the largest impact on IG are Alcoa Inc. (-9.2bps) pushing IG 0.07bps tighter, and Halliburton Company (+21.75bps) adding 0.17bps to IG. HVOL is more sensitive with Alcoa Inc. pushing it 0.28bps tighter, and Johnson Controls Inc contributing 0.16bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Anadarko Petroleum Corp. (-9.68bps) pushing the index 0.08bps tighter, and Halliburton Company (+21.75bps) adding 0.22bps to ExHVOL.

The price of investment grade credit rose 0.24% to around 98.88% of par, while the price of high yield credits rose 1.06% to around 93.5% of par. ABX market prices are higher (improving) by 0.2% of par or in absolute terms, 0.38%. Volatility (VIX) is down -3.16pts to 30.39%, with 10Y TSY selling off (yield rising) 14.8bps to 3.32% and the 2s10s curve steepened by 8.4bps, as the cost of protection on US Treasuries fell 2.99bps to 38bps. 2Y swap spreads tightened 4.4bps to 36.9bps, as the TED Spread widened by 1bps to 0.46% and Libor-OIS deteriorated 0.7bps to 32.7bps.

The Dollar weakened with DXY falling 1.04% to 86.982, Oil rising $1.33 to $75.71 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 3.2% today (a 0.75% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $16.84 to $1216.66 as the S&P rallies (1085.2 2.81%) outperforming IG credits (126bps 0.24%) while IG, which opened tighter at 128.5bps, underperforms HY credits. IG13 and XOver13 are -5bps and -7.5bps respectively while ITRX13 is -2.5bps to 133.5bps.

Dispersion fell -0.5bps in IG. Broad market dispersion is less than historically expected given current spread levels, pointing to a more sanguine view of credits as investors discriminate less between names, with dispersion increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.

28% of IG credits are shifting by more than 3bps and 45% of the CDX universe are also shifting significantly (less than the 5 day average of 52%). The number of names wider than the index increased by 8 to 53 as the day's range fell to 6.75bps (one-week average 6.85bps), between low bid at 125.25 and high offer at 132 and higher beta credits (-1.4%) outperformed lower beta credits (-0.61%).

In IG, tighteners outpaced wideners by around 4-to-1, with 24 credits wider. By sector, CONS saw 18% names wider, ENRGs 35% names wider, FINLs 21% names wider, INDUs 19% names wider, and TMTs 8% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG exFINLs) with the former trading at 122.38bps and the latter at 118bps.

Single-Name Movers
The biggest absolute movers in IG were Halliburton Company (+19.5bps), ACE Ltd. (+17.75bps), and Quest Diagnostics Incorporated (+5bps) in the underperformers, and Anadarko Petroleum Corp. (-9.68bps), Alcoa Inc. (-7.5bps), and American International Group, Inc. (-7bps) in the outperformers. The biggest percentage movers in IG were Halliburton Company (+13.4%), ACE Ltd. (+11.09%), and Devon Energy Corporation (+4.41%) in the underperformers, and Aetna Inc (-6.25%), Dominion Resources, Inc. (-5.93%), and Black & Decker Corporation (-5.8%) in the outperformers.

In Main, the biggest percentage movers were BP PLC (+21.85%), Technip SA (+11.54%), and Deutsche Post AG (+3.08%) in the underperformers, and Banco Santander, S.A. (-12.5%), UniCredit SpA (-9.94%), and Banco Bilbao Vizcaya Argentaria SA (-9.91%) in the outperformers.The largest absolute movers in Main were BP PLC (+82.5bps), Technip SA (+15bps), and Swiss Reinsurance Company (+3.89bps) in the underperformers, and Glencore International AG (-50bps), ArcelorMittal (-40bps), and Hellenic Telecommunications Organization SA (-35bps) in the outperformers.

The biggest percentage movers in XOver were BCM Ireland Finance Ltd (+2.6%), FCE Bank PLC (+1.15%), and Thomson S.A. (+0.93%) in the underperformers, and Nordic Telephone Company Holding ApS (-7.8%), Cable & Wireless Plc (-5.32%), and GKN Holdings Plc (-5.31%) in the outperformers.The largest absolute movers in XOver were BCM Ireland Finance Ltd (+71.14bps), FCE Bank PLC (+7.5bps), and Rhodia SA (+3.99bps) in the underperformers, and ONO Finance, PLC (-43.39bps), Wind Acquisition Finance S.p.A. (-31.94bps), and Kabel Deutschland GmbH (-31.25bps) in the outperformers.

In the names of the HY index, the biggest percentage movers were Radian Group Inc (+4.55%), International Lease Finance Corp. (+3.08%), and Nalco Company (+2.75%) in the underperformers, and ArvinMeritor Inc (-6.94%), TRW Automotive Inc (-5.04%), and New York Times Company/The (-4.99%) in the outperformers. The largest absolute movers in HY were Clear Channel Communications Inc (+39.86bps), Radian Group Inc (+34.71bps), and AMR Corp (+28.04bps) in the underperformers, and First Data Corp (-65.42bps), ArvinMeritor Inc (-58.36bps), and McClatchy Co./The (-57.6bps) in the outperformers.

The CDR Counterparty Risk Index Series 2 (of brokers and banks) fell -4.52bps (or -2.45%) to 179.72bps. Goldman Sachs Group Inc (13bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Goldman Sachs Group Inc (6.52%) is the worst (relative) performer. Royal Bank of Scotland Group Plc (-15bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and HSBC Bank PLC (-8.26%) is the best (relative) performer.

The CDR Aussie Index rose 5.67bps (or 4.54%) to 130.53bps. Woodside Petroleum Limited (39.23bps) is the worst (absolute) performer, whilst Woodside Petroleum Limited (21.15%) is the worst (relative) performer. CSR Limited (-1.81bps) is the best (absolute) performer, and CSR Limited (-2.02%) is the best (relative) performer.

The CDR Asian Index rose 0.51bps (or 0.37%) to 137.76bps. Hitachi Ltd (7.5bps) is the worst (absolute) performer, whilst Mitsubishi Corp (8.76%) is the worst (relative) performer. Promise Co Ltd (-15.16bps) is the best (absolute) performer, and Sumitomo Mitsui Banking Corp (-11.63%) is the best (relative) performer.

Index/Intrinsics Changes
CDR LQD 50 NAIG +0.25bps to 117.82 (18 wider - 32 tighter <> 36 steeper - 14 flatter).

CDR Counterparty Risk Index fell 4.52bps (-2.45%) to 179.72bps (3 wider - 11 tighter).

CDR Government Risk Index fell 8.19bps (-7.06%) to 107.88bps..

CDX14 IG -6bps to 125.5 ($0.26 to $98.9) (FV -0.94bps to 133.39) (26 wider - 91 tighter <> 80 steeper - 44 flatter) - No Trend.

CDX14 HVOL +3.5bps to 198.5 (FV -1.24bps to 0) (9 wider - 17 tighter <> 20 steeper - 10 flatter) - Trend Wider.

CDX14 ExHVOL -9bps to 102.45 (FV -0.85bps to 111.17) (17 wider - 78 tighter <> 35 steeper - 60 flatter).

CDX14 HY (30% recovery) Px $+0.94 to $93.38 / -26.8bps to 676.6 (FV -1.84bps to 651.04) (42 wider - 52 tighter <> 69 steeper - 31 flatter) - Trend Wider.

LCDX14 (70% recovery) Px $+0.12 to $94 / -3.72bps to 419.57 - Trend Wider.

MCDX14 +0.5bps to 208bps. - Trend Wider.

ITRX13 Main -2.62bps to 133.38bps (FV-4.71bps to 136.01bps).

ITRX13 Xover -9bps to 603.5bps (FV-10.03bps to 595.89bps).

ITRX13 FINLs -11.25bps to 178bps (FV-10.13bps to 188.13bps).

DXY weakened 0.96% to 87.06.

Oil rose $1.16 to $75.54.

Gold fell $16.35 to $1217.15.

VIX fell 3.16pts to 30.57%.

10Y US Treasury yields rose 14.6bps to 3.32%.

S&P500 Futures gained 2.68% to 1083.8.

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johngaltfla's picture

Tyler-What's your take on the short end of the yield curve (1-3-6 month) all dropping sharply in yield over the last two weeks? It appears to me that there is no conviction behind the actions of any of these clowns in DC or Brussels nor a desire to gamble and lose again in the equity markets.

mcguire's picture

'credit selling into strength' certainly betrays incredulity in today's equity rally.  for how long though??  seems like the criteria for 'risk on' is two up days in a row... so if there is another market rally tomorrow, will the credit markets ease?  if so, two things follow... 1.  once again, i am forced to swallow the bitter reality that markets are not efficient, like they taught me in school (worse than finding out santa doesnt exist). 2. if i were a central banker, i would treat short term liquidity shocks with interventions into the equity markets rather than in credit markets... seem like it would be cheaper.