Daily Credit Summary: May 6 - Knife Catching Day

Submitted by www.creditresearch.com

Spreads exploded wider today across all markets as contagion from Europe smashed risk appetite everywhere as broad-based macro/index selling/hedging was clearly in play. So many record-breaking moves and breathless dealers that we are a little stunned still by today's action but to be clear, credit was leading equity down out of the gate, did not crash and bounce anything like stocks late afternoon, but closed at 10-month wides in IG and six month wides in HY.

The terrible scenes in Europe along with disappointment at Trichet's lack of QE chatter were enough to send the EUR into free-fall early on and EURJPY suffered greatly. The funding issue rumors persist and short-term liquidity indicators are definitely going the wrong way. The realization that any and all bailouts are irrelevant (no matter whether Greece agrees to severe austerity) and in fact, just like in the case of a corporation, debt restructuring is the only way out of this situation seems to be coming home to many and the modest compression in the CDS-cash basis of Greece and Portugal across the curve seems to agree.

The PIIGS which are now 74% of SovX jumped on average 52bps today (average 425bps) dragging SovX to 166bps (index and intrinsics wonderfully aligned) which as we noted last night is the widest ever (back to Fed09 wides) - now it is getting serious. European bond markets suffered greatly with spreads widening considerably (and please remember that this is not short-seller's fault, the simple act of real money reducing duration to EUR-denominated debt will drag the ask down and remove a constant bid). GER is now 16bps wider than USA - widest ever and the crash in the EUR today shows no real signs of stopping.

EM traded notably down to 280bps or so (intrinsics cracking 300bps intraday) as oil prices cratered and CEEMEA broke 250bps (+33bps today).

EUR FINLs saw Senior dominating the action (with them underperforming Subs at one point which seemed to get no action at all). FINLs jumped 36bps in the 5Y index (vs 22bps intrinsics) as once again we note that broad-based hedging was clearly the play - as opposed to idiosyncratic selling for now. Subs ended above 250bps.

Main closed 17 wider at 123bp and XOver (which was over 85bps wider intraday) close 70bps wider at 550bps - both notably underperforming intrinsics (wait for dealer reracks tomorrow morning). Notably Main ExFINLs widened 13bps today to 108.75bps - this is not simply a financials contagion but a systemic risk repricing based on considerably more concern at the recovery story.

Indices underperformed intrinsics across every major index as liquidity forced moire macro hedging/selling than selective unwinds on a day when fast markets ruled. Bid-Offers widened in all the highest liquidity markets as dealers scrambled.

The US opened gap wider (though was active in the European hours down below yesterday's close) and really never looked back. HY especially just took off but both IG and HY were moving ahead of equities for much of the morning. This sell-off then accelerated as EUR closed, EUR legged down and EURJPY broke some more levels, shifting risk wider once again. Then around 230ET we saw the JPY explode higher (gapping 2 big figures in minutes) and stocks went into free-fall.

On the drop in the S&P and Dow, we have three words - High Frequency Trading. The oh-so-much-less-transparent OTC market did not experience the rampant chase down and it is clear from the tape that this was much more than a simple fat finger trade - algos chasing one another to get back to the year's lowest levels should keep good old Joe Retail out of the US equity market for a little while longer.

Credit did widen but did not really follow the kamikaze path of stocks (which managed to get down to 2010 lows intraday) but did widen and made their widest levels during this period - IG offered at 136bps and HY at $93.625 (670bps) before a recovery and stabilization into the close in stocks and spreads. This left IG over 21bps wider on the day and HY 65bps (a good day's work for our HY-IG decompression trade already). These moves are almost without precedent, despite the earth-shattering events of the last few years.

This was HY's biggest percentage spread widening since 9/28/07 which was the period of Northern Rock stress, just before ML's big subprime loss, and the big Fed rate cut. HY is back above its 200-day average for the first time since April 2009 (and held onto it at the close 618bps is 20-day average spread for on-the-run). There was a decent jump in HY in SEP09 but this was more due to the roll than any specifics in our view. HY initially was way ahead of intrinsics but as the day wore on intrinsics kept pace and by the close they were within a few bps for today's move (though HY remains cheap to intrinsics). The HY curve steepened but intrinsics flattened notably.

IG saw a massive move, intraday this move even beat the Lehman weekend percentage widening). By the close spreads were 'only' 20% wider, or 21bps - amazing. This takes IG back to its widest close since JUL09 and well above its 200-day average at 100bps. IG underperformed intrinsics but it did see single-0names decompressing into the close as the index came back off the wides.

Looking across curves it is tough to say as off-the-run and away from 5Y activity was muted.

FINLs underperformed everywhere today and high beta underperformed low beta. GS smashed wider intrday and came back a little into the close but we strongly suggest taking some profits on the USA vs GS trade that was built systemically to benefit from exactly this kind of tail event. GS ended wider than Citi and flat to MS. Most critically, we see many of the big financial creeping up to th elevels that they were at when the initial CPP plan was enacted in 10/10/08. BAC actually now trades wide of that 186bps level!!! so much for all that govt debt/support.

Monolines got hammered as did insurers and homebuilders saw a 15-20% spread decompression across the board. Autos suffered greatly also. In IG COP was the only name not to widen in 5Y.

EUR non-FINLs were weak and IG ExFINLs also widened 16bps to 111bps today - this is not just a financial story although CDR's CRI index has jumped from 121bps a week ago to 174bps now (almost double what it was 3 weeks ago).

In credit single-names, the Top CDO-related names jumped on average 15% today in spread terms (29bps opn an index of 193bps) - a huge move but we did not see IG9 moving (illiquidity) and suggest some pain was felt today ion corr desks that could lead to index moves tomorrow. This was a notable underperformance over the broad market (but this tends to reflect the higher beta nature which we have discussed before).

There was really no up-in-quality trade across credit today (ok a very slight outperformance in IG cohorts) but the moves were systemic. Finance, Consumer Cyclical, and Leisure sectors underperformed. Energy, Utilities, and Capital Goods were the relatively best performers.

DV01-adjusted worse performers today were AMR, MBIA Insco, HOV, SDS, HOC, CCU, UIS, GMAC, FDC, FSL, FMCC, LIZ, MBIA Inc, MGM, and Level 3 - all well loved dogs being unwound en masse. Baker Hughes, SUNW, Exxon, Chevron, MHK, and some rail names outperformed.

Capital Structure Changes
96% of our universe was in agreement that credit and equity deteriorated today, none agreed better, 3.5% divergent with Equity beating credit and only 2 names divergent with credit beating equity.

Among the names that agreed on deterioration, the following were the Top 5 where equity relatively underperformed (based on spread and equity vol): CVC 5Y +28bps (+0.28SDs) and Stock -3.45SDs (-7.35%), NU 5Y +2bps (+0.4SDs) and Stock -3.14SDs (-4.11%), OKE 5Y +2bps (+0.33SDs) and Stock -2.57SDs (-4.36%), MCCC 5Y +69bps (+1.25SDs) and Stock -3.39SDs (-10.89%), and DOV 5Y +2bps (+0.39SDs) and Stock -2.52SDs (-5.7%). On the other side, the following names were the entities that agreed on weaknes but saw credit the greater underperformer CNQ CN 5Y +18bps (+3.85SDs) and Stock -0.69SDs (-1.54%), FCX US 5Y +39bps (+4.13SDs) and Stock -0.62SDs (-2.02%), CBS 5Y +45bps (+5.65SDs) and Stock -1.26SDs (-4.06%), KFT 5Y +24bps (+5.82SDs) and Stock -1.01SDs (-1.83%), and HSP 5Y +37bps (+6.58SDs) and Stock -1.32SDs (-2.97%).

ETN 5Y 0bps (0SDs) and Stock -2.31SDs (-5.17%) and BHI 5Y 0bps (-0.08SDs) and Stock -1.08SDs (-3.2%) saw credit outperforming equity (with equity weak).

Divergent names where credit underperformed include T CN 5Y +8bps (+1.38SDs) and Stock +1.18SDs (1.82%), TRW 5Y +77bps (+1.5SDs) and Stock +1.2SDs (4.84%), SJR/B CN 5Y +30bps (+4.14SDs) and Stock +0.08SDs (0.11%), NEM 5Y +21bps (+3.65SDs) and Stock +0.81SDs (2.07%), and ABX CN 5Y +26bps (+3.9SDs) and Stock +2.03SDs (4.37%)

HSP, KFT, CBS, RIG, SO, SJR/B CN, FCX US, ABX CN, NYT, and CNQ CN were the largest spread wideners in terms of spread vol. DO, TA CN, XOM, ETN, and BHI were the best performers.

Movers in Detail
Spreads were mixed in the US with IG worse, HVOL improving, ExHVOL weaker, and HY selling off. IG trades 38bps wide (cheap) to its 50d moving average, which is a Z-Score of 5.4s.d.. At 128bps, IG has closed tighter on 221 days in the last 348 trading days (JAN09). The last five days have seen IG diverging from its 50d moving average. HY trades 26.2bps wide (cheap) to its 50d moving average, which is a Z-Score of 4.5s.d. and at 631.86bps, HY has closed tighter on 109 days in the last 348 trading days (JAN09).

Indices typically underperformed single-names with skews widening in general as IG's skew widened as it underperformed, HVOL outperformed but narrowed the skew, ExHVOL's skew widened as it underperformed, HY's skew widened as it underperformed.

93.6% of names in IG moved more than their historical vol would imply as higher vol names underperformed lower vol names by 18.64% to 17.06%. IG's vol is around 451.35% per 1 day period, with average IG single-name vol around 7.29%.

The names having the largest impact on IG are Pfizer Inc. (+3bps) pushing IG 0.02bps tighter, and General Electric Capital Corp (+69.5bps) adding 0.53bps to IG. HVOL is more sensitive with Vornado Realty LP pushing it 0.42bps tighter, and General Electric Capital Corp contributing 2.27bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Pfizer Inc. (+3bps) pushing the index 0.03bps tighter, and Hartford Financial Services Group (+60bps) adding 0.59bps to ExHVOL.

The price of investment grade credit fell 1.01% to around 98.78% of par, while the price of high yield credits fell 2.63% to around 95% of par. ABX market prices are lower by 1.02% of par or in absolute terms, 0.16%. Volatility (VIX) is up 7.89pts to 32.8%, with 10Y TSY rallying (yield falling) 14.4bps to 3.4% and the 2s10s curve flattened by 7.2bps, as the cost of protection on US Treasuries rose 3.76bps to 44bps. 2Y swap spreads widened 5.8bps to 37.47bps, as the TED Spread widened by 5.4bps to 0.27% and Libor-OIS improved 0.2bps to 12.2bps.

The Dollar strengthened with DXY rising 0.93% to 84.862, Oil falling $3.04 to $76.93 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 6.39% today (a 2.87% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $32.55 to $1207.83 as the S&P is down (1118.1 -3.94%) underperforming IG credits (128bps -1.01%) while IG, which opened tighter at 104.25bps, outperforms HY credits. IG13 and XOver13 are +7.69bps and +70.5bps respectively while ITRX13 is +17.31bps to 123bps.

Dispersion rose +7.7bps 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.

100% of IG credits are shifting by more than 3bps and 94% of the CDX universe are also shifting significantly (more than the 5 day average of 60%). The number of names wider than the index decreased by 2 to 47 as the day's range rose to 32bps (one-week average 10.55bps), between low bid at 104 and high offer at 136 and higher beta credits (19.75%) underperformed lower beta credits (16.33%).

In IG, wideners outpaced tighteners by around 125-to-0, with 125 credits wider. By sector, CONS saw 100% names wider, ENRGs 100% names wider, FINLs 100% names wider, INDUs 100% names wider, and TMTs 100% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG exFINLs) with the former trading at 108bps and the latter at 110.65bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 80.36bps from 80.09bps, but remains above the short-term average of 68.79bps, with the HY/XOver ratio falling to 1.15x, below its 5-day mean of 1.15x. The IG-Main spread decompressed to 5bps from -0.94bps, and remains above the short-term average of 2.24bps, with the IG/Main ratio rising to 1.04x, above its 5-day mean of 1.02x. 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 outperformed financials as IG ExFINLs are wider by 15.9bps to 110.6bps, with 0 of the 106 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 28.71bps to 172.37bps, with Banks (worst) wider by 30.58bps to 156.67bps, Brokers (best) wider by 42.5bps to 233.08bps, and Finance names wider by 47.39bps to 342.88bps. Monolines are trading wider on average by 203.31bps (15.81%) to 2387.32bps.

In IG, FINLs underperformed non-FINLs (17.91% wider to 16.79% wider respectively), with the former (IG FINLs) wider by 25.6bps to 168.5bps, with 0 of the 19 names tighter. The IG CDS market (as per CDX) is 22.8bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (105.25bps), with the bond ETFs underperforming the IG CDS market by around 2.41bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 12.64bps to 108bps (with ITRX FINLs -trending wider- weaker by 36 to 183bps) and is currently trading at the wides of the week's range at 100%, between 108 to 79.8bps, and is trending wider. Main LoVOL (trend wider) is currently trading at the wides of the week's range at 99.99%, between 108.32 to 74.97bps. ExHVOL underperformed LoVOL as the differential decompressed to 9.89bps from -5.44bps, and remains above the short-term average of -0.63bps. The Main exFINLS to IG ExHVOL differential compressed to -10.21bps from 7.84bps, and remains below the short-term average of 4.1bps.

The Emerging Market index is 0.2% riskier (0.4bps wider) to 251.6bps. EM (Trend Wider) is currently trading at the wides of the week's range at 100.08%, between 251.6 to 216.2bps. The HY-EM spread decompressed to 380.23bps from 309.85bps, but remains above the short-term average of 297.95bps, with the HY/EM ratio rising to 2.51x, above its 5-day mean of 2.28x.

Index/Intrinsics Changes
CDR LQD 50 NAIG +18.88bps to 112.44 (50 wider - 0 tighter <> 9 steeper - 41 flatter).

CDX14 IG +23.25bps to 128 ($-1.01 to $98.78) (FV +16.3bps to 118.2) (125 wider - 1 tighter <> 54 steeper - 71 flatter) - Trend Wider.

CDX14 HVOL -0.3bps to 159 (FV +24.43bps to 0) (30 wider - 0 tighter <> 17 steeper - 13 flatter) - Trend Wider.

CDX14 ExHVOL +30.69bps to 118.21 (FV +13.81bps to 100.62) (95 wider - 0 tighter <> 58 steeper - 37 flatter).

CDX14 HY (30% recovery) Px $-2.63 to $95 / +70.8bps to 631.9 (FV +66.36bps to 565.12) (100 wider - 0 tighter <> 6 steeper - 94 flatter) - Trend Wider.

LCDX14 (70% recovery) Px $-2.62 to $95.13 / +75.44bps to 385.9 - Trend Wider.

MCDX14 +20bps to 163.5bps. - Trend Wider.

ITRX13 Main +17.31bps to 123bps (FV+13.6bps to 115.99bps).

ITRX13 XOver +70.5bps to 551.5bps (FV+39.59bps to 502.43bps).

ITRX13 FINLs +36bps to 183bps (FV+22.84bps to 172.42bps).

CDR Counterparty Risk Index rose 27.73bps (19.3%) to 171.39bps (14 wider - 0 tighter).

CDR Government Risk Index rose 17.31bps (16.24%) to 123.9bps..

DXY strengthened 0.9% to 84.83.

Oil fell $3.02 to $76.95.

Gold rose $33.02 to $1208.3.

VIX increased 7.89pts to 32.8%.

10Y US Treasury yields fell 14.4bps to 3.4%.

S&P500 Futures lost 4.04% to 1116.9.

Single-Name Movers

Today's biggest absolute movers in IG were General Electric Capital Corp (+67bps), American International Group, Inc. (+65bps), and SLM Corp (+61.25bps) in the wideners, and Deere & Co. (+3bps), Pfizer Inc. (+3.76bps), and United Parcel Service Inc. (+3.88bps) in the tighteners. Today's biggest percentage movers in IG were General Electric Capital Corp (+41.74%), Kraft Foods Inc. (+41.59%), and CBS Corporation (+36.93%) in the wideners, and Kinder Morgan Energy Partners LP (+3.62%), Deere & Co. (+4.58%), and National Rural Utilities Cooperative Finance Corporation (+6.06%) in the tighteners.

In the more financial-heavy CDR NAIG LQD 50 index, sentiment is bearish with 50 wider to 0 tighter, and 9 steeper to 41 flatter as 20 of the 50 credits have inverted curves. The biggest absolute movers were General Electric Capital Corp (+67bps), Goldman Sachs Group Inc (+47.5bps), and Morgan Stanley (+45bps) in the wideners, and Campbell Soup Company (+5.5bps), Conagra Foods Inc (+6bps), and Wal-Mart Stores Inc. (+9bps) in the tighteners. The biggest percentage movers in the CDR NAIG LQD 50 were General Electric Capital Corp (+41.74%), Kraft Foods Inc. (+41.59%), and Wells Fargo & Company (+32.98%) in the wideners, and GATX Corporation (+7.46%), Ryder System Inc. (+8.97%), and Simon Property Group, L.P. (+10.33%) in the tighteners.

In Main, the biggest percentage movers were Enel SpA (+29.75%), Iberdrola SA (+29.34%), and Hellenic Telecommunications Organization SA (+25.64%) in the wideners, and Cadbury Holdings Limited (-2.54%), JTI (UK) Finance PLC (+0.16%), and Groupe Danone (+0.71%) in the tighteners.The largest absolute movers in Main were Banco Espirito Santo SA (+57.48bps), Hellenic Telecommunications Organization SA (+50bps), and Portugal Telecom International Finance B.V. (+49.17bps) in the wideners, and Cadbury Holdings Limited (-0.75bps), JTI (UK) Finance PLC (+0.07bps), and Groupe Danone (+0.5bps) in the tighteners.

The biggest percentage movers in XOver were Fiat SpA (+21.53%), Peugeot SA (+16.04%), and International Power Plc (+13.84%) in the wideners, and Infineon Technologies AG (+0.48%), Unity Media GmbH (+3.54%), and Wind Acquisition Finance S.p.A. (+3.79%) in the tighteners.The largest absolute movers in XOver were BCM Ireland Finance Ltd (+158.31bps), Seat Pagine Gialle SpA (+153.06bps), and Grohe Holding GmbH (+86.78bps) in the wideners, and Infineon Technologies AG (+1.06bps), Cognis GmbH (+11.05bps), and Havas SA (+16.63bps) in the tighteners.

In the names of the HY index, today's biggest percentage movers were GMAC LLC (+30.29%), Flextronics International Ltd. (+28.97%), and DISH DBS Corporation (+25%) in the wideners, and Owens-Illinois Inc. (+2.69%), American Axle & Manufacturing Inc (+2.78%), and Iron Mountain Incorporated (+2.81%) in the tighteners. The largest absolute movers in HY were AMR Corp (+222.11bps), Energy Future Holdings Corp. (+175.67bps), and First Data Corp (+174.9bps) in the wideners, and Owens-Illinois Inc. (+8.75bps), Iron Mountain Incorporated (+11.25bps), and Sabre Holdings Corp (+18.38bps) in the tighteners.

The CDR Counterparty Risk Index Series 2 (of brokers and banks) rose 27.73bps (or 19.3%) to 171.39bps. Goldman Sachs Group Inc (47.5bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst JP Morgan Chase & Co. (30.6%) is the worst (relative) performer. Dresdner Bank AG (7.65bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and Dresdner Bank AG (8.81%) is the best (relative) performer.

The CDR Aussie Index rose 6.99bps (or 8.63%) to 88bps. Westfield Trust (14.75bps) is the worst (absolute) performer, whilst Australia & New Zealand Banking Group Limited (16.46%) is the worst (relative) performer. Macquarie Bank Limited (0bps) is the best (absolute) performer, and Macquarie Bank Limited (0%) is the best (relative) performer.

The CDR Asian Index rose 6.07bps (or 6.23%) to 103.41bps. Kobe Steel Ltd (23.15bps) is the worst (absolute) performer, whilst Kobe Steel Ltd (22.96%) is the worst (relative) performer. Tokio Marine & Nichido Fire Insurance Co., Ltd. (-1.44bps) is the best (absolute) performer, and Tokio Marine & Nichido Fire Insurance Co., Ltd. (-1.73%) is the best (relative) performer.

Comments

[credittrader]

Apologies to all - in the Single-Name Movers - there were no tighteners so when you see tighteners think "least wideners"...lol

HY and IG leaking wider after-hours. 

[ghostfaceinvestah]

This IMHO is what triggered the equity computers.

[doolittlegeorge]

so not even governments can command free money.  any other news?

[JacksCompleteLa...]

Thanks CT for the correction and the report. I have to admit i got snowblinded about halfway through.

What does this widening say about corporates ability to roll over debt in the near term? Ok thats rhetorical, clearly some people are going to have unexpectedly high costs in the near term, and some banks might have asset problems with the falling prices of IG debt. Am i reading this right?

[credittrader]

No sweat Jacks... yes, this raises concerns about refinancing (especially given the high implied fwd rates for financials given the massive size of the TLGP debt they need to roll!!! e.g. GS at 77bps YIELD not spread average on $21bn due within 2 years). Curves have been flattening to reflect that risk - today saw all liquidity focused on 5Y so tough to really say what happened in curve-land.

Also - HY has rallied so far so fast as much on supposed fundamentals as on a wall of liquiidty that has allowed constant refinancing (hardly any real delevering) - there remains 10s of billions due in the next 2-3 years that will struggle to find a home (or be rolled up into some term loan that subordinate unsecureds and hurt just as bad)...

But I guess a day or five does not make a trend - although we sense the credit cycle started to turn around 2-3 weeks ago.

[Benzass Miphist]

Just a thought but one explanation why the ECB hasn't pulled out the bazooka yet is to give the speculators a little more line before setting the hook. If you let the fish swallow the hook really good and run awhile,  you have a good chance of killing the fish outright by being gut-hooked.  Just sayin' but it won't work in the long run in this case.

[spekulatn]

Great work as usual CTrader.

[Grand Supercycle]

MAY 1st:

"The weekly DOW chart shows an expanding wedge indicating a significant move is probable... this remains an overbought bear market rally and the uptrend could falter at any time.

http://www.zerohedge.com/forum/latest-market-outlook-0#comment-326767