Daily Credit Summary: May 7 - Under The Covers

Courtesy of www.creditresearch.com

Spreads were broadly wider today with breadth very negative as single-names caught up to the index underperformance from yesterday. Despite what appeared a better-than-expected jobs print, derisking was rife once again and European financials led the way. High beta single-names underperformed low-beta dramatically and curves generally flattened at the short-end and steepened at the long-end (though liquidity out from 5Y was less than average).

Performance in the US was massively gappy early on and calmed down a bit in the afternoon. Before we get to the record books, we want to stress that while there was clearly a flight-to-US-quality trade today, the outperformance close-to-close in IG is as much about index arb on a gappy day as it is any rerisking attitude so do not get caught up with a 9.5bps compression. IG intrinsics widened 2bps to the index's 9.5bps compression which narrowed the skew to within 1bps. 3Y index stands notably cheap to intrinsics as do 7 and 10Y (but the latter are illiquid as all heck today).

This index outperformance was very apparent in HY also as early crashes down over 2 handles (back above 700bps intraday) and pulls back as index arb and single-name underperformance narrowed the skew to more 'normal' levels. Off-the-Runs underperformed smashingly (yes we are running out of adverbs) which also suggests more on-the-run index compression technical pressure as rolls and curve trades are unwound. While we are not sure of the liquidity, IG9 was notably wider (>13bps on our runs) while IG14 rallied and HY13 and HY9 notably underperformed HY14 as more pain trades are unwound.

Europe was ugly once again as single-name FINLs were destroyed as rumors that one or more face significant funding issues (Banco Espirito Santo and RBS were worst absolute performers but all were very much wider and flatter in 3s5s), iTraxx FINLs saw technical protection selling pressure hold it in as intrinsics gapped 20bps wider (the skew swung from index 10bps cheap to 10bps rich intraday). SovX limped wider, taking out those all-time wides we discussed yesterday, with modest outperformance in intrinsics. Interestingly we saw EM and CEEMEA sovereigns underperforming notably today (as oil prices tumbled further).

While most of the text so far has dealt with index swings relative to intrinsics, Main and XOver were very clearly derisked today with intrinsics underperforming but very much in the same direction. XOver traded back above 600bps (up to 635bps intra) and closed just below it as Main was almost at 150bps before it smashed back in more line with intrinsics. Both indices closed notably wider but traded sideways for the latter end of the day as the feeling was lumpy trading and noone wanting to be really long risk into the weekend.

Ranges were enormous again intraday with IG 26.5bps wide to tight (141bps to 114.5bps) and HY 116bps wide to tight (707bps to 590bps) - though both ranges were marginally smaller than yesterday's gigantic moves. Bid-offers gapped to 4bps in IG as we took out yesterday's wides and reached up to within 1bps of the 7/13/09 (on-the-run adjusted) swing wides of 142bps - a notable stopping place for IG given the scream wider. HY managed to get back to levels not seen since DEC09 (holding well above the swing wides in mid Feb10. HY also held well above its 50- and 200-day moving averages. See Movers section for Pivot points.

Flattening was evident in pretty much every index and intrinsics pair today with 3Y underperforming 5Y. The Major FINLs (not the consumer finance or marginal names) generally outperformed non-FINLs in the US in 5Y risk but it looked like there was a lot of 3Y derisking in the major US names against this (but again liquidity was weak). If not then I suspect we saw some long US FINLs, Short EUR FINLs going into the weekend. Of the 14 member sof the CDR CRI, RBS is now the riskiest, followed by GS and MS.

We are going to keep today's EOD brief as liquidity was so lumpy. Our thought on the weekend's activities are as follows: a TLGP-style loan program for EU banks will see a short gap tighter in EU FINLs followed by bull steepening followed by a realization that it did nothing but kick-the-can. Any Fed swap line activity will be gold positive and EU FINL negative as in the end, everyone knows the end-game - and to be honest we are not sure the ECB is too worried about a weak EUR for a while...Greece is not getting away from this problem, any time soon and we suspect the market won't let it - remember a bailout/loan won't solve it and anything more 'biblical' would be market negative just as anything more prosaic will not please the market (and will see other peripherals get pushed further).

I will try and post a week-over-week update later this evening for a bigger picture look at the moves recently.

Have a great weekend and we expect to see you online Sunday night.

Movers in Detail
Spreads were mixed in the US with IG tighter, HVOL wider, ExHVOL better, and HY selling off. IG trades 28.6bps wide (cheap) to its 50d moving average, which is a Z-Score of 3.5s.d.. At 119bps, IG has closed tighter on 209 days in the last 349 trading days (JAN09). The last five days have seen IG diverging from its 50d moving average. HY trades 30.2bps wide (cheap) to its 50d moving average, which is a Z-Score of 4.2s.d. and at 641.78bps, HY has closed tighter on 117 days in the last 349 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.

23.2% of names in IG moved more than their historical vol would imply as higher vol names outperformed lower vol names by 0.51% to 1.23%. IG's vol is around 419.98% per 1 day period, with average IG single-name vol around 7.29%.

The names having the largest impact on IG are CBS Corporation (-21bps) pushing IG 0.17bps tighter, and Alcoa Inc. (+43.75bps) adding 0.32bps to IG. HVOL is more sensitive with CBS Corporation pushing it 0.71bps tighter, and Alcoa Inc. contributing 1.37bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both UnitedHealth Group Inc (-12bps) pushing the index 0.12bps tighter, and National Rural Utilities Cooperative Finance Corporation (+32.75bps) adding 0.33bps to ExHVOL.

The price of investment grade credit rose 0.41% to around 99.17% of par, while the price of high yield credits fell 0.12% to around 94.63% of par. ABX market prices are lower by 0.27% of par or in absolute terms, 0.83%. Volatility (VIX) is up 8.15pts to 39.65%, with 10Y TSY selling off (yield rising) 2.4bps to 3.42% and the 2s10s curve steepened by 0.1bps, as the cost of protection on US Treasuries fell 1bps to 43bps. 2Y swap spreads tightened 1.6bps to 36.13bps, as the TED Spread widened by 3.9bps to 0.31% and Libor-OIS deteriorated 6bps to 18.1bps.

The Dollar weakened with DXY falling 0.41% to 84.544, Oil falling $1.98 to $75.13 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 2.66% today (a 2.98% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $1.11 to $1209.68 as the S&P is down (1105.5 -1.51%) underperforming IG credits (119bps 0.42%) while IG, which opened tighter at 115.75bps, outperforms HY credits. IG13 and XOver13 are -6.88bps and +50.5bps respectively while ITRX13 is +12bps to 135.5bps.

Dispersion rose +4.1bps 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.

52% of IG credits are shifting by more than 3bps and 63% of the CDX universe are also shifting significantly (less than the 5 day average of 66%). The number of names wider than the index increased by 5 to 51 as the day's range fell to 26.5bps (one-week average 14.88bps), between low bid at 114.5 and high offer at 141 and higher beta credits (1.25%) underperformed lower beta credits (0.56%).

In IG, wideners outpaced tighteners by around 3-to-2, with 59 credits wider. By sector, CONS saw 47% names wider, ENRGs 65% names wider, FINLs 53% names wider, INDUs 56% names wider, and TMTs 21% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG exFINLs) with the former trading at 123.75bps and the latter at 111.11bps.

Cross Market, we are seeing the HY-XOver spread compressing to 40.78bps from 87.94bps, and remains below the short-term average of 67.8bps, with the HY/XOver ratio falling to 1.07x, below its 5-day mean of 1.14x. The IG-Main spread compressed to -16.5bps from 5bps, and remains below the short-term average of -0.55bps, with the IG/Main ratio falling to 0.88x, below its 5-day mean of 1x. Among the HY names, we see higher risk names (>500bps) underperforming 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 1.2bps to 111.1bps, with 42 of the 106 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 4.15bps to 173.17bps, with Finance names (worst) wider by 22.15bps to 364.72bps, Banks (best) tighter by 9.79bps to 144.58bps, and Brokers tighter by 13.17bps to 215.17bps. Monolines are trading wider on average by 10.9bps (1.91%) to 2381.05bps.

In IG, FINLs underperformed non-FINLs (2.07% wider to 1.13% wider respectively), with the former (IG FINLs) wider by 3.5bps to 173.5bps, with 6 of the 19 names tighter. The IG CDS market (as per CDX) is 20.5bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (98.46bps), with the bond ETFs underperforming the IG CDS market by around 2.71bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 15.12bps to 123.75bps (with ITRX FINLs -trending wider- better by 0.5 to 182.5bps) and is currently trading at the wides of the week's range at 100%, between 123.75 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 118.61 to 74.97bps. ExHVOL outperformed LoVOL as the differential compressed to -23.61bps from 8.98bps, and remains below the short-term average of -3.99bps. The Main exFINLS to IG ExHVOL differential decompressed to 28.75bps from -9.32bps, and remains above the short-term average of 7.42bps.

The Emerging Market index is 12.8% riskier (32.6bps wider) to 287.6bps. EM (Trend Wider) is currently trading at the wides of the week's range at 99.97%, between 287.6 to 216.8bps. The HY-EM spread compressed to 354.19bps from 383.47bps, but remains above the short-term average of 313.42bps, with the HY/EM ratio falling to 2.23x, below its 5-day mean of 2.28x.

Index/Intrinsics Changes
CDR LQD 50 NAIG -1.38bps to 110.53 (19 wider - 24 tighter <> 36 steeper - 13 flatter).

CDX14 IG -9.5bps to 119 ($0.41 to $99.17) (FV +1.59bps to 120.4) (59 wider - 49 tighter <> 88 steeper - 36 flatter) - Trend Wider.

CDX14 HVOL +33.09bps to 195 (FV +5.2bps to 0) (19 wider - 7 tighter <> 21 steeper - 9 flatter) - Trend Wider.

CDX14 ExHVOL -22.95bps to 95 (FV +0.48bps to 101.26) (40 wider - 55 tighter <> 28 steeper - 67 flatter).

CDX14 HY (30% recovery) Px $-0.12 to $94.63 / +3.3bps to 641.8 (FV +23.28bps to 589.6) (87 wider - 11 tighter <> 43 steeper - 57 flatter) - Trend Wider.

LCDX14 (70% recovery) Px $+0.37 to $95.5 / -10.97bps to 374.56 - Trend Wider.

MCDX14 -0.5bps to 163bps. - Trend Wider.

ITRX13 Main +12bps to 135.5bps (FV+13.27bps to 128.44bps).

ITRX13 XOver +50.5bps to 601bps (FV+71.36bps to 567.37bps).

ITRX13 FINLs --0.5bps to 182.5bps (FV+20.31bps to 191.1bps).

CDR Counterparty Risk Index rose 4.15bps (2.46%) to 173.17bps (8 wider - 6 tighter).

CDR Government Risk Index fell 2bps (-1.62%) to 121.64bps..

DXY weakened 0.41% to 84.54.

Oil fell $1.98 to $75.13.

Gold rose $1.11 to $1209.68.

VIX increased 8.15pts to 39.65%.

10Y US Treasury yields rose 2.4bps to 3.42%.

S&P500 Futures lost 1.51% to 1105.5.

Single-Name Movers

Today's biggest absolute movers in IG were Alcoa Inc. (+43.75bps), SLM Corp (+40bps), and National Rural Utilities Cooperative Finance Corporation (+32.75bps) in the wideners, and CBS Corporation (-21bps), Simon Property Group, L.P. (-17bps), and UnitedHealth Group Inc (-12bps) in the tighteners. Today's biggest percentage movers in IG were XL Capital Limited (+19.01%), National Rural Utilities Cooperative Finance Corporation (+18.71%), and Alcoa Inc. (+15.09%) in the wideners, and CBS Corporation (-12.73%), Simon Property Group, L.P. (-10.83%), and Walt Disney Company/The (-9.66%) in the tighteners.

In Main, the biggest percentage movers were Bouygues (+30.74%), Deutsche Bahn AG (+29.15%), and Royal Bank of Scotland Group Plc (+25%) in the wideners, and Telefonica SA (-1.39%), Banco Bilbao Vizcaya Argentaria SA (+1.46%), and Rolls-Royce Group PLC (+1.71%) in the tighteners.The largest absolute movers in Main were Banco Espirito Santo SA (+55bps), Royal Bank of Scotland Group Plc (+46.5bps), and Repsol YPF SA (+45bps) in the wideners, and Telefonica SA (-2.5bps), Rolls-Royce Group PLC (+1.56bps), and Fortum Oyj (+2.5bps) in the worst performers.

The biggest percentage movers in XOver were Ladbrokes plc (+31.13%), CIR S.p.A. (+30.88%), and BCM Ireland Finance Ltd (+30.58%) in the wideners, and Cognis GmbH (-9.12%), UPC Holding BV (+4.65%), and Fiat SpA (+5.14%) in the worst performers..The largest absolute movers in XOver were BCM Ireland Finance Ltd (+540.26bps), ONO Finance, PLC (+338.94bps), and NXP b.v. (+297.45bps) in the wideners, and Cognis GmbH (-16.05bps), Fresenius SE (+20bps), and Fiat SpA (+22.5bps) in the worst performers..

In the names of the HY index, today's biggest percentage movers were Saks Incorporated (+25.33%), Textron Financial Corp (+22.86%), and Levi Strauss & Company (+21.39%) in the wideners, and SunGard Data Systems Inc. (-98.81%), Boyd Gaming Corporation (-6.54%), and Nova Chemicals Corp. (-5.6%) in the tighteners. The largest absolute movers in HY were Saks Incorporated (+141.86bps), K Hovnanian Enterprises, Inc. (+125.79bps), and Levi Strauss & Company (+125.15bps) in the wideners, and SunGard Data Systems Inc. (-704.59bps), Boyd Gaming Corporation (-75.15bps), and AMR Corp (-44.06bps) in the tighteners.

Comments

[ghostfaceinvestah]

Huge move in SunGard today.

[faustian bargain]

OT - I'm waiting for the weekly FDIC press releases...how late are they going to post them?

What's the over/under for this week's bank failures?

[boricuadigm-shift]

Only two so far:

Access Bank, Champlin, MN
The Bank of Bonifay, Bonifay, FL

[fuu]

There went two more. One in San Diego and one in Mesa.

http://www.fdic.gov/bank/individual/failed/1stpacific.html

http://www.fdic.gov/bank/individual/failed/townebank.html

[spekulatn]

Great stuff CT. Thanks for sharing.

[Grand Supercycle]

This was posted on May 1st - a week before the crash.

 '11,250 / 300 is an area of significant resistance and if this level can’t be breached it should signal the end of the March 2009 bear market rally - 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 - the VIX index continues to give bullish warnings which is bearish for equities - long term charts of key equity indexes continue to give bearish warnings and the March 2009 lows will be breached in my opinion - USD Index bullish warnings since 2009 on the weekly and monthly chart have not changed and further USD strength and thus EURO weakness is still expected '

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

http://stockmarket618.wordpress.com

[hedgeless_horseman]

moved