Commentary courtesy of www.creditresearch.com
Spreads closed tighter today with HY notably outperforming IG and both ahead of stocks at the close. HY has now outperformed stocks and US outperformed EUR for three days in a row but we suspect a lot of this index performance is skew and roll related as we are not seeing as positive sentiment in the broader market (and skews were much narrower in EUR initially).
Stress in the Spanish banking system is nothing new but with DS-K swooping in this week from the IMF, and the oh-so-trustworthy Stress-Tests due to be announced, anxiety was running high as Spain sovereign risk broke back above 250bps and BBVA and Santander struggled wider and flattened (CEE sovereigns also floundered today). Of course, far more importantly, World Cup favorites Spain lost their first round football match to the Swiss 1-0 (shame I hear you all cry).
Today's option expiry in credit helped with some early activity but volumes were relatively low as we stayed within a pretty tight range. Notably that range was the sweet spot for much of the recent comments we have said about negative gamma (117-120ish) where we had seen some major rushes across this region and recently backfilled and traded it more fully. Today's expiry might help to lift some of that technical impact and bring back IG and HY to more 'real' trading.
Breadth was solid in US credit single-names today with tighteners outpacing wideners about 2-to-1 and while the HY index compressed 10bps or so (outperforming IG) we saw a very clear theme in single-name of HY outperformance of IG names. In fact, lower rated credits significantly outperformed BBB to AA- rated names today with the latter on average wider by cohort - mirroring the strong underperformance of these cohorts during this roll. Between the CDS roll this weekend, the continued skew compression in HY14, and the much more notable 3s5s flattening, we are less convinced of this as any re-emergence of risk appetite en masse (although HY bond yields did compress today and we saw a pick up in volume from recent days - though well below average).
HY, The Roll, Skews, and Risk Appetite
We suspect much of the HY improvements are CDS roll related and more discriminatory unwinds into short-term strength. The higher-rated underperformance today was largely due to the weakness in Energy and Utility names as those two sectors were the clear losers on the day (the only two sectors that showed average decompression today). A glance at the skew on HY14 shows that we are currently at the tightest the index has been to intrinsics since inception (see below) suggesting the macro overlays are being lifted against underlying unwinds but of course beta to stocks is leading them both tighter - we feel that a narrower skew (more in line with XOver) is much better for post roll resets since it removes a potential hole in any decompression trade - we will likely be adding to the HY-IG decompression here over the next couple of days.
Since inception the HY-IG trade has done very well but has pulled back close to our trailing stops here (although positively we see skews much narrower providing for a cleaner trade in our view). Today's close below 600bps in HY is the first time since 5/17 (and we note that IG is 9-10bps wider of the comparable levels from 5/17). We feel the compression in HY is as much related to the roll and index arb and while a 110bps compression close-to-close since 6/9 is significant (and somewhat beta-risk related), the fact that we have had three days in a row of double-digit HY spread compression (first time since mid Feb) and outperformance of S&P futures for three days in a row (as intrinsics and 3s5s curves have tended to be far less sanguine) suggests HY index moves are a little ahead of real risk appetite for now (and with HY bonds underperforming on a pick up in volume helps to support our case).
Perhaps notable is the fact that both IG and HY are pulling back to their longer-run averages. We track this relationship via Z-Scores and while we saw IG's 50-day cross above its 200-day and continues to rise (and HY continues to move in the same bearish direction - now only 15bps away from the cross), both HY and IG were well over 3 standard deviations above their 50-day averages during the last few weeks - suggesting at least some level of oversold bounce was likely. Today's moves brings both back to less than 0.5 stdevs cheap to their 50-day average - a much more comfortable level of relative risk. Of most note though and worth paying close attention to was HY's close tighter than its 200-day average for the first time since 5/17 and the rolling beta between IG and HY is back at 4.7x (its highest since 4/27). Balancing these short-term signals of momentum with a understanding of roll and skew technicals as well as 3s5s flattening (which in HY14 just broke below its flattest since inception) provides us with some mental cushion against jumping on the rerisking bandwagon.
Financials outperformed followed by Leisure, Media, and Basic Materials - which obviously corresponds to the sectors with the worst performance of the last roll and supports somewhat the idea of pre-roll unwinds which likely as not have been spurred by some thin-volume stock rallies and EUR stability. In Financials, consumer finance and insurers were the better performers (again perfectly mirroring their positions as recent major underperformers). Builders were weak following the disastrous prints and we found TOL's confirmation that things aint so good somewhat comforting - it seems once again that Bob was on his game a few week's back - but ABX and CMBX were modestly higher in price on average today.
Movers in Detail
Spreads were mixed in the US with IG tighter, HVOL wider, ExHVOL better, and HY rallying. IG trades 11bps wide (cheap) to its 50d moving average, which is a Z-Score of 0.7s.d.. At 117.25bps, IG has closed tighter on 213 days in the last 376 trading days (JAN09). The last five days have seen IG converging to its 50d moving average. HY trades 80.1bps wide (cheap) to its 50d moving average, which is a Z-Score of 0.2s.d. and at 593.81bps, HY has closed tighter on 98 days in the last 376 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 10.5bps (or 62%). Interestingly, based on short-run empirical betas between IG, HY, and the S&P, stocks underperformed HY by an equivalent 16.6bps (~ 98%), and stocks underperformed IG by an equivalent 1.3bps (~ 96%) - (implying IG outperformed HY (on an equity-adjusted basis)).
The names having the largest impact on IG are Hartford Financial Services Group (-37.5bps) pushing IG 0.28bps tighter, and Halliburton Company (+27.5bps) adding 0.21bps to IG. HVOL is more sensitive with SLM Corp pushing it 1.01bps tighter, and RR Donnelley & Sons Company contributing 0.59bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Hartford Financial Services Group (-37.5bps) pushing the index 0.37bps tighter, and Halliburton Company (+27.5bps) adding 0.28bps to ExHVOL.
The price of investment grade credit rose 0.06% to around 99.25% of par, while the price of high yield credits rose 0.63% to around 96.38% of par. ABX market prices are higher (improving) by 0.59% of par or in absolute terms, 2.86%. Volatility (VIX) is up 0.05pts to 25.92%, with 10Y TSY rallying (yield falling) 4.2bps to 3.26% and the 2s10s curve flattened by 1.8bps, as the cost of protection on US Treasuries fell 2.17bps to 37bps. 2Y swap spreads widened 0.1bps to 36.75bps, as the TED Spread tightened by 1.8bps to 0.45% and Libor-OIS improved 0.3bps to 32.5bps.
The Dollar strengthened with DXY rising 0.18% to 86.136, Oil rising $0.56 to $77.5 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 1.08% today (a 0.91% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $4.25 to $1229.9 as the S&P rallies (1113.9 0.04%) outperforming IG credits (117.25bps 0.06%) while IG, which opened wider at 120bps, underperforms HY credits. IG13 and XOver13 are -3.5bps and -11.5bps respectively while ITRX13 is -2bps to 126.25bps.
Dispersion fell -1.4bps 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.
36% of IG credits are shifting by more than 3bps and 51% of the CDX universe are also shifting significantly (more than the 5 day average of 50%). The number of names wider than the index increased by 1 to 53 as the day's range fell to 5.5bps (one-week average 5.64bps), between low bid at 116.5 and high offer at 122 and higher beta credits (-1.3%) outperformed lower beta credits (-0.21%).
In IG, tighteners outpaced wideners by around 2-to-1, with 36 credits wider. By sector, CONS saw 21% names wider, ENRGs 71% names wider, FINLs 21% names wider, INDUs 19% names wider, and TMTs 29% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG exFINLs) with the former trading at 115.63bps and the latter at 113bps.
Cross Market, we are seeing the HY-XOver spread compressing to 33.31bps from 38.78bps, but remains below the short-term average of 63.12bps, with the HY/XOver ratio falling to 1.06x, below its 5-day mean of 1.11x. The IG-Main spread decompressed to -9bps from -9.62bps, but remains below the short-term average of -6.49bps, with the IG/Main ratio rising to 0.93x, below its 5-day mean of 0.95x. Among the HY names, we see higher risk names (>500bps) outperforming lower risk (<500bps) names. In the IG names, we see higher beta names outperforming lower beta names.
In the US, non-financials underperformed financials as IG ExFINLs are wider by 0.1bps to 113bps, with 54 of the 106 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 4.71bps to 157.43bps, with Finance names (worst) tighter by 13.5bps to 389.77bps, Banks (best) tighter by 9.46bps to 128.04bps, and Brokers tighter by 9.75bps to 201.92bps. Monolines are trading tighter on average by -196.65bps (6.18%) to 2696.2bps.
In IG, FINLs outperformed non-FINLs (3.85% tighter to 0.07% wider respectively), with the former (IG FINLs) tighter by 7.6bps to 189.2bps, with 13 of the 19 names tighter. The IG CDS market (as per CDX) is 13.4bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (103.82bps), with the bond ETFs underperforming the IG CDS market by around 53.24bps.
In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 1.68bps to 115.63bps (with ITRX FINLs -trending tighter- better by 3.25 to 168.75bps) and is currently trading tight to its week's range at 0%, between 122.69 to 115.63bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at 4.74%, between 115.63 to 107.22bps. ExHVOL underperformed LoVOL as the differential decompressed to -12bps from -12.18bps, but remains below the short-term average of -8.83bps. The Main exFINLS to IG ExHVOL differential decompressed to 20.01bps from 19.64bps, but remains above the short-term average of 17.17bps.
The Emerging Market index is 0.2% riskier (0.7bps wider) to 277.2bps. EM (Trend Tighter) is currently trading tight to its week's range at 2.12%, between 308.9 to 276.5bps. The HY-EM spread compressed to 316.62bps from 334.26bps, but remains below the short-term average of 361.67bps, with the HY/EM ratio falling to 2.14x, below its 5-day mean of 2.25x.
CDR LQD 50 NAIG -3.23bps to 103.71 (7 wider - 33 tighter <> 25 steeper - 25 flatter).
CDR Counterparty Risk Index fell 4.71bps (-2.9%) to 157.43bps (4 wider - 10 tighter).
CDR Government Risk Index rose 0.05bps (0.04%) to 112.04bps..
CDX14 IG -1.38bps to 117.25 ($0.06 to $99.25) (FV -1.06bps to 124.29) (36 wider - 68 tighter <> 67 steeper - 58 flatter) - Trend Tighter.
CDX14 HVOL +0.75bps to 185.745 (FV -3.5bps to 0) (10 wider - 19 tighter <> 12 steeper - 18 flatter) - Trend Tighter.
CDX14 ExHVOL -2.05bps to 95.62 (FV -0.31bps to 105.56) (26 wider - 69 tighter <> 40 steeper - 55 flatter).
CDX14 HY (30% recovery) Px $+0.63 to $96.38 / -17bps to 593.8 (FV -13.28bps to 586.4) (16 wider - 82 tighter <> 62 steeper - 36 flatter) - Trend Tighter.
LCDX14 (70% recovery) Px $+0.75 to $96.25 / -21.84bps to 352.43 - Trend Tighter.
MCDX14 -1bps to 209.5bps. - No Trend.
ITRX13 Main -2bps to 126.25bps (FV+0.62bps to 130.54bps).
ITRX13 Xover -11.5bps to 560.5bps (FV-11.17bps to 555.83bps).
ITRX13 FINLs -3.25bps to 168.75bps (FV+0.48bps to 178.06bps).
DXY strengthened 0.18% to 86.14.
Oil rose $0.56 to $77.5.
Gold fell $4.25 to $1229.9.
VIX increased 0.05pts to 25.92%.
10Y US Treasury yields fell 4.2bps to 3.26%.
S&P500 Futures gained 0.04% to 1113.9.
The biggest absolute movers in IG were Halliburton Company (+27.5bps), RR Donnelley & Sons Company (+18bps), and Anadarko Petroleum Corp. (+16.2bps) in the underperformers, and Hartford Financial Services Group (-37.5bps), SLM Corp (-35bps), and American International Group, Inc. (-25bps) in the outperformers. The biggest percentage movers in IG were Halliburton Company (+17.46%), RR Donnelley & Sons Company (+8.7%), and General Mills Inc. (+7.21%) in the underperformers, and Hartford Financial Services Group (-11.11%), XL Capital Limited (-6.9%), and Barrick Gold Corp. (-6.21%) in the outperformers.
In Main, the biggest percentage movers were Gas Natural SDG SA (+15.3%), Iberdrola SA (+13.21%), and Repsol YPF SA (+11.36%) in the underperformers, and Xstrata Plc (-6.64%), Muenchener Rueckversicherungs AG (-5%), and Holcim Ltd (-3.38%) in the outperformers.The largest absolute movers in Main were BP PLC (+47.5bps), Gas Natural SDG SA (+34.82bps), and EDP-Energias de Portugal, S.A. (+26.54bps) in the underperformers, and Banco Espirito Santo SA (-16.5bps), Xstrata Plc (-16bps), and Glencore International AG (-15bps) in the outperformers.
The biggest percentage movers in XOver were Valeo SA (+1.6%), Codere Finance SA (+1.27%), and GKN Holdings Plc (+1.11%) in the underperformers, and FCE Bank PLC (-6.02%), UPM-Kymmene Oyj (-5.36%), and Fresenius SE (-4.35%) in the outperformers.The largest absolute movers in XOver were Codere Finance SA (+10.11bps), Valeo SA (+3.5bps), and GKN Holdings Plc (+2.5bps) in the underperformers, and BCM Ireland Finance Ltd (-61.13bps), Seat Pagine Gialle SpA (-48.54bps), and FCE Bank PLC (-37.5bps) in the outperformers.
In the names of the HY index, the biggest percentage movers were Pride International Inc. (+5.26%), KB Home (+4.17%), and RadioShack Corp (+3.32%) in the underperformers, and Dole Food Company, Inc. (-9.6%), Dillard's, Inc. (-8.5%), and Nalco Company (-7.69%) in the outperformers. The largest absolute movers in HY were KB Home (+20bps), Pride International Inc. (+19bps), and Royal Caribbean Cruises Ltd (+15bps) in the underperformers, and Dole Food Company, Inc. (-71.35bps), First Data Corp (-65.23bps), and Clear Channel Communications Inc (-49.59bps) in the outperformers.
The CDR Counterparty Risk Index Series 2 (of brokers and banks) fell -4.71bps (or -2.9%) to 157.43bps. UBS AG (5bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst UBS AG (3.13%) is the worst (relative) performer. Citigroup Inc (-24bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and Citigroup Inc (-12.21%) is the best (relative) performer.
The CDR Aussie Index fell -2.08bps (or -1.68%) to 121.4bps. Foster's Group Limited (0.88bps) is the worst (absolute) performer, whilst Foster's Group Limited (1.19%) is the worst (relative) performer. Macquarie Bank Limited (-8.5bps) is the best (absolute) performer, and RIO Tinto Ltd (-4.04%) is the best (relative) performer.
The CDR Asian Index fell -1.57bps (or -1.17%) to 132.26bps. KT Corp (7.66bps) is the worst (absolute) performer, whilst KT Corp (6.76%) is the worst (relative) performer. Promise Co Ltd (-26.89bps) is the best (absolute) performer, and Sharp Corporation (-9.42%) is the best (relative) performer.