Daily Credit Summary: November 27 - DuSell; And Some Sovereign - Sen/Sub Observations
Commentary compliments of www.creditresearch.com
Spreads (rather unsurprisingly) ended wider from Wednesday's close as HY broke above 700bps for the first time since Nov 7th and underperformed IG. Volumes were pretty decent for a holiday half-day and while we ended off the wides, having tracked stocks most of the day, the close was generally weak.
Single-name breadth was very negative, at around 10-to-1, but indices underperformed intrinsics in all the major indices. IG saw its widest close since Nov 3rd as sovereign risk was up in pretty much all cases. Our discussion yesterday of SovX and this morning's look at CRI and GRI, while early, tend to portend some inherent systemic threats undermining the recovery's shaky foundations at best. CMBS prices fell modestly amid very low volumes today and the weakness in financials (Citi back above 200bps and GS back above 100bps) continue to support our view on Sen-Sub over SovX.
Only 21 of our 450 name active CDS universe tightened since Wednesday's close with a tendency towards Food & Beverage and Airlines (somewhat surprisingly). The weakest sectors were Gaming, Builders, Publishers, and Wired Telcos, but Banks and Autos were pretty much weaker across the board. Utilities (mainly Independents), Pipelines & Energy Services, and Healthcare names saw the best performance. Across credit quality, we note a significant underperformance of higher quality credits to lower quality in relative terms as low beta names also underperformed higher beta names suggesting systemic risk leaking into corporates (and remember our LoVOL vs SovX idea).
Seems a very defensive day (as one would expect) and while IG was not quite as hard-hit as some expected, HY-IG decompressed to near 600bps (as XOver-Main topped 450bps). The VIX jump today makes sense given our comments earlier in the wek on VIX/VXV as the ratio (steepness of the short-end of the vol curve) normalizes a little, and implied correlation for 2010 rose notably.
Some perspective shows Aussie 9.3% wider in spread since Wednesday's close, Asia 5.8% wider in spread, US IG & HY around 4.1%. The dollar strength (and commenst from Japan) as this 'event' occurred should provide those momo carry traders with some pause for thought as we suspect that there will be some move back to JPY as the carry currency given its similar low levels of rates and perhaps less chance of systemic devaluation (and today's comeback in gold prices perhaps signals a bifurcation among those seeking safety of not just buying 'safe' dollars, but buying 'safer' gold in any panic scenario).
Have a great weekend and as a final food for thought - see the chart below comparing SovX intrinsics back for 18 months and ITRX FINLs Sen-Subs.