Commentary courtesy of www.creditresearch.com
Spreads ended the day notably wider (HY wider than 'flash-crash' close) with stocks managing to slightly underperform on a beta-adjusted basis as broad-based selling in single-names and indices made today feel a little more 'real' than recent swings. There are a few signals of regime change today that make us nervous even with potential clarity from Germany and FINREG due very soon.
After some midday covering on EUR (eh hem intervention), the cloture vote triggered more selling and that weakness gathered pace and stocks and credit closed considerably weaker. ES_F closed at the lows of the day and while credit was weak, equity's beta-adjusted performance was notably worse than credit's on the day. HY, which traded over 690bps intraday (shy of the intraday wides of 706bps on 5/6), closed wider than the 'flash-crash' day's close taking it back to end NOV09 wides. IG was weak but remained inside of the 5/6 closing levels. HY-IG decompressed further and we hop those clients who followed us into this trade move those stops up to at least breakeven now (with a target of 600bps).
Another greater-than 8% close-to-close move in IG has dealers pushing bid-offers wider and pulling back on runs on general while it seems that HY is a little more liquid for now somewhat strangely. Off-the-runs in IG and HY seemed to outperform today but we wonder whether this was more about liquidity disappearing towards the close - though HY14-13 seemed to make a move and IG9 did leg wider early on, not helped by high beta deterioration and monolines getting crushed (and we note that Top CDO-referenced names underperformed the broad market significantly today which along with IG9's outperformance of IG14 suggests some significant over-hedging (tail risk fears) in single-names was going on in corr desks).
The last 30 mins or so saw IG and HY wider as stocks underperformed but we really noticed that HY was underperforming IG and intrinsics. Some stability intraday took some of the edge off but the late day move is worrisome - given the supposed clarity we are going to get from Merkel and the Senate sometime soon (and less OPEX stress perhaps) - suggesting again a more real derisking is occurring (or perhaps a re-evaluation of credit fundamentals in light of a possible liquidity suck-out).
ABX and CMBX prices fell notably as liquidity left the building with ABX underperforming. As an FYI, the average price of all the ABX tranches is now $25.5 (we just wonder where all those Level 3 assets marks are and presume these are still fire-sale prices, eh hem, sarcasm off).
While IG somewhat outperformed HY on the day in an absolute sense, there was no real clear theme among single-names as better-rated names were just as systemically sold as lower-rated (perhaps if I squinted I could see AA/AA- names slightly outperform). Breadth was very weak (381 wider to 15 tighter) across our liquid universe today as Non-Cyclicals and Healthcare outperformed the rest of the sectors (but all industries we covered were wider close-to-close today). Finance and Consumer Cyclical names were hit hardest with Autos, Monolines, and Consumer Finance worst.
Interestingly the Top 100 LBO names we track modestly outperformed the broad market today - which is what we had discussed as an expectation - since the chaos and volatility is hardly the stable low funding cost environment on which Private Equity preys. On average our index of all the names we cover saw credit spreads move around 6.8% wider today - one of the largest single-name day moves we can remember and reinforcing our concern that risk appetite is drifting here.
TSYs screamed lower in yield and the pain trade (aside from AUDJPY) was clearly 2s10s steepeners which traded 9-10bps flatter and dipped below 250bps at the close (its flattest since OCT09 - below the late NOV09 swing flats. DXY actually closed down on the day agains suggesting some of this weakness is much more than simply EUR fears and VIX smashed over 10pts higher (above 45) as the on-the-run 1Y equity implied correlation jumped to 77% (its highest since MAR09!).
IG-HY bonds decompressed 12bps today as IG bond spreads jumped 15bps (underperforming CDS) and HY around 16bps (based on Bloomberg's FINRA data). It seems the hedging for IG was already in place (once again the basis chart tells us that) and now the cash unwind begins and perhaps today's late day dump in HY is (forgetting margin calls for a minute) the realization of a HY hedge before HY cash unwinds. With dispersion rising notably recently, it is clear that single-name discrimination is becoming more prevalent and we hope our approach to modeling RV is helpful in that regard (so far so good).
CDR LQD 50 NAIG +6.29bps to 110.76 (47 wider - 3 tighter <> 26 steeper - 24 flatter).
CDR Counterparty Risk Index rose 9.44bps (6.11%) to 164.06bps (14 wider - 0 tighter).
CDR Government Risk Index rose 7.13bps (7.74%) to 99.21bps..
CDX14 IG +11.5bps to 125 ($-0.5 to $98.91) (FV +8.1bps to 123.48) (120 wider - 6 tighter <> 67 steeper - 58 flatter) - Trend Wider.
CDX14 HVOL +16.07bps to 186 (FV +15.37bps to 0) (30 wider - 0 tighter <> 16 steeper - 14 flatter) - Trend Wider.
CDX14 ExHVOL +10.06bps to 105.74 (FV +5.88bps to 102.96) (90 wider - 5 tighter <> 44 steeper - 51 flatter).
CDX14 HY (30% recovery) Px $-2 to $93.25 / +55.5bps to 679.7 (FV +39.95bps to 624.18) (99 wider - 1 tighter <> 11 steeper - 19 flatter) - Trend Wider.
LCDX14 (70% recovery) Px $-1.66 to $93.88 / +49.78bps to 422.72 - Trend Wider.
MCDX14 +3.75bps to 169.5bps. - No Trend.
ITRX13 Main +4.96bps to 126bps (FV+9.28bps to 122.89bps).
ITRX13 Xover +26.2bps to 602.5bps (FV+35.01bps to 578.14bps).
ITRX13 FINLs +8.88bps to 168bps (FV+11.18bps to 164.4bps).
DXY weakened 0.58% to 85.89.
Oil fell $1.86 to $68.01.
Gold fell $11.35 to $1182.4.
VIX increased 10.47pts to 45.79%.
10Y US Treasury yields fell 15.6bps to 3.22%.
S&P500 Futures lost 3.9% to 1066.6.
Movers in Detail
Spreads were broadly wider in the US as all the indices deteriorated. IG trades 31.5bps wide (cheap) to its 50d moving average, which is a Z-Score of 2.8s.d.. At 125bps, IG has closed tighter on 226 days in the last 358 trading days (JAN09). The last five days have seen IG diverging from its 50d moving average. HY trades 42bps wide (cheap) to its 50d moving average, which is a Z-Score of 3.7s.d. and at 679.73bps, HY has closed tighter on 163 days in the last 358 trading days (JAN09).
Indices typically underperformed single-names with skews widening in general as IG's skew widened as it underperformed, HVOL underperformed but widened the skew, ExHVOL's skew widened as it underperformed, HY's skew widened as it underperformed.
40.8% of names in IG moved more than their historical vol would imply as higher vol names underperformed lower vol names by 6.23% to 5.89%. IG's vol is around 372.58% per 1 day period, with average IG single-name vol around 7.29%.
The names having the largest impact on IG are CVS Caremark Corporation (-1.07bps) pushing IG 0.01bps tighter, and American International Group, Inc. (+65.5bps) adding 0.46bps to IG. HVOL is more sensitive with Home Depot Inc. pushing it 0.04bps tighter, and American International Group, Inc. contributing 1.97bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both CVS Caremark Corporation (-1.07bps) pushing the index 0.01bps tighter, and Freeport-McMoRan Copper & Gold Inc. (+37bps) adding 0.37bps to ExHVOL.
The price of investment grade credit fell 0.5% to around 98.91% of par, while the price of high yield credits fell 2% to around 93.25% of par. ABX market prices are lower by 0.55% of par or in absolute terms, 1.29%. Volatility (VIX) is up 10.47pts to 45.79%, with 10Y TSY rallying (yield falling) 15.6bps to 3.22% and the 2s10s curve flattened by 9.1bps, as the cost of protection on US Treasuries fell 0.48bps to 38.5bps. 2Y swap spreads widened 4.4bps to 40.81bps, as the TED Spread widened by 1.4bps to 0.33% and Libor-OIS deteriorated 0.6bps to 25.2bps.
The Dollar weakened with DXY falling 0.58% to 85.893, Oil falling $1.86 to $68.01 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 1.73% today (a 3.24% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $11.35 to $1182.4 as the S&P is down (1066.6 -3.9%) underperforming IG credits (125bps -0.5%) while IG, which opened wider at 117bps, outperforms HY credits. IG13 and XOver13 are +1.8bps and +26.2bps respectively while ITRX13 is +4.96bps to 126bps.
Dispersion rose +8.3bps 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 decreasing more than expected today indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads.
70% of IG credits are shifting by more than 3bps and 77% of the CDX universe are also shifting significantly (more than the 5 day average of 64%). The number of names wider than the index decreased by 1 to 48 as the day's range rose to 10bps (one-week average 10.3bps), between low bid at 116.5 and high offer at 126.5 and higher beta credits (6.21%) underperformed lower beta credits (5.92%).
In IG, wideners outpaced tighteners by around 20-to-1, with 120 credits wider. By sector, CONS saw 92% names wider, ENRGs 94% names wider, FINLs 100% names wider, INDUs 100% names wider, and TMTs 96% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG exFINLs) with the former trading at 115.5bps and the latter at 112.67bps.
Cross Market, we are seeing the HY-XOver spread decompressing to 77.23bps from 47.93bps, and remains above the short-term average of 73.84bps, with the HY/XOver ratio rising to 1.13x, below its 5-day mean of 1.14x. The IG-Main spread decompressed to -1bps from -7.54bps, but remains below the short-term average of -0.92bps, with the IG/Main ratio rising to 0.99x, below its 5-day mean of 0.99x. Among the HY names, we see higher risk names (>500bps) underperforming 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 6.8bps to 112.7bps, with 5 of the 106 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 9.44bps to 164.06bps, with Finance names (worst) wider by 28.67bps to 385.38bps, Banks (best) wider by 8.87bps to 145.92bps, and Brokers wider by 14.55bps to 213.17bps. Monolines are trading wider on average by 382.45bps (15.19%) to 3119.06bps.
In IG, FINLs underperformed non-FINLs (9.19% wider to 6.41% wider respectively), with the former (IG FINLs) wider by 15.6bps to 185.6bps, with 0 of the 19 names tighter. The IG CDS market (as per CDX) is 21bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (103.99bps), with the bond ETFs outperforming the IG CDS market by around 0.6bps.
In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 3.98bps to 115.5bps (with ITRX FINLs -trending wider- weaker by 8.88 to 168bps) and is currently trading at the wides of the week's range at 100%, between 115.5 to 90.13bps, and is trending wider. Main LoVOL (trend wider) is currently trading at the wides of the week's range at 100.01%, between 104.84 to 86.32bps. ExHVOL underperformed LoVOL as the differential decompressed to 0.89bps from -7.5bps, and remains above the short-term average of -1.65bps. The Main exFINLS to IG ExHVOL differential compressed to 9.76bps from 15.84bps, but remains above the short-term average of 8.46bps.
The Emerging Market index is 10.6% riskier (29.6bps wider) to 308.3bps. EM (Trend Wider) is currently trading at the wides of the week's range at 99.96%, between 308.3 to 241.9bps. The HY-EM spread decompressed to 371.46bps from 345.52bps, but remains above the short-term average of 339.05bps, with the HY/EM ratio falling to 2.2x, below its 5-day mean of 2.26x.
Today's biggest absolute movers in IG were American International Group, Inc. (+65.5bps), SLM Corp (+43.34bps), and Freeport-McMoRan Copper & Gold Inc. (+37bps) in the wideners, and CVS Caremark Corporation (-1.07bps), XTO Energy Inc (-0.72bps), and Yum! Brands Inc (-0.28bps) in the outperformers. Today's biggest percentage movers in IG were American International Group, Inc. (+16.82%), Freeport-McMoRan Copper & Gold Inc. (+16.59%), and Constellation Energy Group Inc. (+15.63%) in the wideners, and XTO Energy Inc (-1.9%), CVS Caremark Corporation (-1.63%), and Yum! Brands Inc (-0.29%) in the outperformers.
In the more financial-heavy CDR NAIG LQD 50 index, sentiment is very bearish with 47 wider to 3 tighter, and 26 steeper to 24 flatter as 8 of the 50 credits have inverted curves. The biggest absolute movers were General Electric Capital Corp (+23.17bps), GATX Corporation (+23bps), and Morgan Stanley (+20.33bps) in the wideners, and CVS Caremark Corporation (-1.07bps), Sara Lee Corp. (-0.07bps), and Cisco Systems Inc. (-0.02bps) in the tighteners. The biggest percentage movers in the CDR NAIG LQD 50 were Simon Property Group, L.P. (+13.26%), GATX Corporation (+11.95%), and Wells Fargo & Company (+11.56%) in the wideners, and CVS Caremark Corporation (-1.63%), Sara Lee Corp. (-0.1%), and Cisco Systems Inc. (-0.03%) in the tighteners.
In Main, the biggest percentage movers were Xstrata Plc (+35.96%), Anglo American Plc (+28.81%), and Glencore International AG (+28.47%) in the wideners, and Cadbury Holdings Limited (-2.06%), GDF Suez (-1.03%), and Vattenfall AB (-0.78%) in the outperformers.The largest absolute movers in Main were Glencore International AG (+99.74bps), Xstrata Plc (+81.34bps), and ArcelorMittal (+60.91bps) in the wideners, and GDF Suez (-0.69bps), Cadbury Holdings Limited (-0.59bps), and National Grid plc (-0.58bps) in the outperformers.
The biggest percentage movers in XOver were Societe Air France (+22.35%), Deutsche Lufthansa AG (+19.64%), and ThyssenKrupp AG (+18.84%) in the wideners, and NXP b.v. (-0.37%), Unity Media GmbH (+0.62%), and ISS Holding A/S (+0.96%) in the outperformers.The largest absolute movers in XOver were BCM Ireland Finance Ltd (+169.66bps), Ineos Group Holdings plc (+102.23bps), and Societe Air France (+95bps) in the wideners, and NXP b.v. (-4.77bps), Unity Media GmbH (+4.05bps), and ISS Holding A/S (+6.2bps) in the outperformers.
In the names of the HY index, today's biggest percentage movers were McClatchy Co./The (+15.56%), American Axle & Manufacturing Inc (+15.54%), and Textron Financial Corp (+15.06%) in the wideners, and RadioShack Corp (-1.41%), Iron Mountain Incorporated (+0.85%), and First Data Corp (+1.82%) in the outperformers. The largest absolute movers in HY were McClatchy Co./The (+181.48bps), Energy Future Holdings Corp. (+164.89bps), and American Axle & Manufacturing Inc (+116.89bps) in the wideners, and RadioShack Corp (-3.15bps), Iron Mountain Incorporated (+3.75bps), and Limited Brands, Inc. (+9.45bps) in the outperformers.
The CDR Counterparty Risk Index Series 2 (of brokers and banks) rose 9.44bps (or 6.11%) to 164.06bps. Morgan Stanley (20.33bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Morgan Stanley (9.69%) is the worst (relative) performer. HSBC Bank PLC (2.93bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and Deutsche Bank AG (2.45%) is the best (relative) performer.
The CDR Aussie Index rose 0.24bps (or 0.23%) to 104.64bps. Woodside Petroleum Limited (-6.77bps) is the best (absolute) performer, and Telecom Corporation of New Zealand Limited (-5.04%) is the best (relative) performer.
The CDR Asian Index rose 5.36bps (or 4.74%) to 118.5bps. Promise Co Ltd (105.98bps) is the worst (absolute) performer, whilst Promise Co Ltd (19.35%) is the worst (relative) performer. Toyota Motor Corporation (-0.9bps) is the best (absolute) performer, and Toyota Motor Corporation (-1.04%) is the best (relative) performer.