Daily Credit Summary: March 15: Be Brave, Little Doddy

Commentary provided by www.creditresearch.com

Spreads widened today with breadth notably negative in credit, intraday ranges relatively low, and HY underperforming IG. Even as equity managed a late day surge back to unch (on low volumes), credit (especially FINLs) was unimpressed, managing to end in the middle of its narrow range. European markets closed weak as FINLs underperformed and were the main driver of spread performance. US FINLs (equities and credit) were weaker before Dodd's announcement, legged a little weaker on his actual words, but then diverged in the late day as XLF took off but CDS remained near wides of the day.

The late day surge was critically absent support from EURJPY (which makes it very unique in recent months) as EURJPY hovered around 123.7 from Dodd's annoucement as XLF and SPY took off (the latter by 8 S&P pts equivalent). It seemed some index-watchers pushed IG and HY better as the S&P took off but from dealer chatter, there was no follow through or seemingly confident move (as compared to equity's all-seeing eye).

European credit closed weak with FINLs the driver as Senior-Sub nudged back up to 60bps as SovX also leaked 2-3bps wider (narrowing the skew). Spain and Portugal's bonds (note BONDS!) underperformed the rest of Europe (and their CDS). Sov CDS was not moving much today but Japan leaked 2bps wider as UK underperformed the majors (and chatter of USA's AAA rating outlook did nothing to impact USA risk). China risk moved marginally wider (as inflationary / tightening chatter picked up) and we would urge readers to look back at our sovereign strategy piece from a few weeks back that discussed China CDS as a play on currency valuation.

Perhaps, given the late day moves in stocks, 'See SPY Run' would have been a better title than a 'Noddy'-related one especially given the lack of intraday follow-thru from DXY, EURJPY, Credit, and TSYs as stocks took off. This week will likely be sloppy as the combination of equity OPEX and Credit's roll will make for some notable technicals. Note that equity-implied correlation also rose today to one-month highs (a less reflexively-driven indication of market risk aversion).

Movers in Detail
Spreads were mixed in the US with IG worse, HVOL wider, ExHVOL better, and HY selling off. IG trades 5.9bps tight (rich) to its 50d moving average, which is a Z-Score of -0.8s.d.. At 84bps, IG has closed tighter on only 19 days in the last 310 trading days (JAN09). The last five days have seen IG flat to its 50d moving average.

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

Only 12% of names in IG moved more than their historical vol would imply as higher vol names underperformed lower vol names by 2.32% to 1.14%. IG's vol is around 4.38% per 1 day period, which leaves 97 names higher vol and 28 lower vol than the index.

The names having the largest impact on IG are McDonald's Corporation (-2.5bps) pushing IG 0.02bps tighter, and International Lease Finance Corp. (+17.74bps) adding 0.13bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 0.08bps tighter, and International Lease Finance Corp. contributing 0.55bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both McDonald's Corporation (-2.5bps) pushing the index 0.03bps tighter, and Hartford Financial Services Group (+6bps) adding 0.07bps to ExHVOL.

The price of investment grade credit fell 0.03% to around 100.67% of par, while the price of high yield credits fell 0.25% to around 99.5% of par. ABX market prices are lower by 0.1% of par. Volatility (VIX) is up 0.43pts to 17.99%, with 10Y TSY selling off (yield rising) 0.2bps to 3.71% and the 2s10s curve steepened by 1bps, as the cost of protection on US Treasuries fell 0.15bps to 31.85bps. 2Y swap spreads tightened 1.2bps to 19.78bps, as the TED Spread tightened by 0bps to 0.12% and Libor-OIS improved 0.7bps to 5.5bps.

The Dollar strengthened with DXY rising 0.52% to 80.245, Oil falling $1.32 to $79.92 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 2.07% today (a 1.1% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $5 to $1106.9 as the S&P is down (1150.5 -0.07%) underperforming IG credits (84bps -0.03%) while IG, which opened wider at 84.5bps, outperforms HY credits. IG12 and XOver12 are +1.52bps and +14bps respectively while ITRX12 is +2.25bps to 76.25bps.

Dispersion rose +1.3bps 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 decreasing more than expected today indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads.

25% of IG credits are shifting by more than 3bps and 45% of the CDX universe are also shifting significantly (more than the 5 day average of 35%). The number of names wider than the index increased by 1 to 52 as the day's range fell to 1.75bps (one-week average 2.4bps), between low bid at 83.5 and high offer at 85.25 and higher beta credits (2.82%) underperformed lower beta credits (1.41%).

In IG, wideners outpaced tighteners by around 4-to-1, with 94 credits wider. By sector, CONS saw 66% names wider, ENRGs 71% names wider, FINLs 65% names wider, INDUs 85% names wider, and TMTs 92% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG13 exFINLs) with the former trading at 74.31bps and the latter at 81bps.

Cross Market, we are seeing the HY-XOver spread compressing to 87.74bps from 95.35bps, but remains below the short-term average of 97.69bps, with the HY/XOver ratio falling to 1.21x, below its 5-day mean of 1.24x. The IG-Main spread compressed to 7.75bps from 9.25bps, and remains below the short-term average of 8.54bps, with the IG/Main ratio falling to 1.1x, below its 5-day mean of 1.11x. Among the HY names, we see higher risk names (>500bps) outperforming lower risk (<500bps) names. In the IG names, we see higher beta names underperforming lower beta names.

In the US, non-financials outperformed financials as IG ExFINLs are wider by 1.6bps to 81bps, with 15 of the 105 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 3.21bps to 99.67bps, with Banks (worst) wider by 5.21bps to 107.25bps, Finance names (best) tighter by 2.55bps to 332.61bps, and Brokers wider by 3.92bps to 127.67bps. Monolines are trading wider on average by 66.95bps (2.44%) to 2335.99bps.

In IG, FINLs outperformed non-FINLs (1.81% wider to 2.02% wider respectively), with the former (IG FINLs) wider by 2.6bps to 143.9bps, with 7 of the 20 names tighter. The IG CDS market (as per CDX) is 14.9bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (69.06bps), with the bond ETFs outperforming the IG CDS market by around 0.65bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 1.87bps to 74.31bps (with ITRX FINLs -trading sideways- weaker by 3.75 to 84bps) and is currently trading at the wides of the week's range at 90.78%, between 74.5 to 72.44bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading at the wides of the week's range at 92.15%, between 64.46 to 62.79bps. ExHVOL outperformed LoVOL as the differential compressed to 0.41bps from 2.38bps, and remains below the short-term average of 0.56bps. The Main exFINLS to IG ExHVOL differential decompressed to 9.57bps from 7.11bps, and remains above the short-term average of 9.39bps.

The Emerging Market index is 2% riskier (4.4bps wider) to 218.8bps. EM12 (Trend Tighter) is currently trading in the middle of the week's range at 32.27%, between 228.1 to 214.4bps. The HY-EM spread decompressed to 293.92bps from 291.92bps, but remains above the short-term average of 290.55bps, with the HY/EM ratio falling to 2.34x, above its 5-day mean of 2.31x.

Comments

[lsbumblebee]

And my Zero Hedge runs smooth without those annoying anonymi!

[lizzy36]

the headline.....have you no shame?

[rubearish10]

So, who's smarter Equities or Credit? Do credit spreads need to be tighter for new equity highs? The SPX1150 threshold is too important to matter, so let's get it over with..

[mark456]

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