Daily Credit Summary: October 1 - Risk Off
Spreads widened significantly amid very negative breadth once again today as risk appetite was clearly shifting today with TSYs rallying strongly, dollar safe-haven status reappearing, HY underperforming IG, and credit and equity risk premia rising. IG12 saw its biggest close-to-close widening since 04/20 (absolute) and 02/17 (percentage!) as VIX and swaption vols both rose significantly on the day and single-name activity was its highest (at 71% moving more than 3bps) in over three weeks.
All risky assets closed at their lows as the disappointing macro numbers today (following on from yesterday's green shoot withering headlines) were not helped later in the day by the weak auto sales numbers (which were in general in line to slight worse than expected but dramatically down from CfC summer-time fun and games). The unusual dollar questioning of Bernanke pushed some volatility into DXY (and ramping in EUR/JPY was unable to budge it much) as his 'other-than-fiscal issues' comment (which reminds us of Monty Python discussing the Romans) slammed DXY and then saw a run to quality as DXY closed at its highest since 09/08.
Other than a very late day drop, the selling in credit seemed fairly orderly though, no major gaps intraday as notable pivot point support was tested and taken out ion both SPY and IG as volume picked up dramatically as XLF dramatically underperformed SPY on the day.
In credit, financials outperformed non-financials today despite the CDR Counterparty Risk Index (CRI) jumped back above 100bps since 9/15. European sovereigns weakened considerably also with our Government risk index (GRI) up by 1bps led by European majors weakness (indicated by SovX pushing back up towards 50bps led by UK and Spain). Notably ITRX Main ExFINLs underperformed this widening in SovX helping that decompression trade.
Technically speaking, our note last week on the significance of the triple-trough divergence between IG movement and two of our main momentum indicators appears to have nailed this reversion. IG12 (or 13 if adjusted) broke above the 50-day moving average today. This is the fifth time we have tested this average since it initially broke it on 04/22, but today's move is the largest break above the average during that time and highest close above it. The 50-day average is 112.5bps and we suspect will act as support now that we are through it and our momentum indicators are pushing higher (confirming this move).
A look at some recent swings provides some context that the swings in IG have tended to run 7-10 trading days and range between 13 and 27% with this latest move pretty much in the middle of that range (though any move beyond that could be taken as confirming a new widening trend rather than countertrend sell-off): 9/23 low 95.5bps to 10/1 high 120.5 is a 26% rise in 7 trading days, 8/24 low 111bps to 9/02 high 125.5 is a 13% rise in 8 trading days, 8/07 low 104bps to 8/19 high 126.5 is a 21% rise in 9 trading days, 7/01 low 128bps to 7/13 high 148 is a 16% rise in 8 trading days, 6/10 low 117bps to 6/23 high 148.75 is a 27% rise in 10 trading days, and 5/7 low 132.5bps to 5/15 high 160 is a 21% rise in 8 trading days. The notable difference in today's (the recent move) is the amount it is above the 50-day moving average and the acceleration in the widening, which we did not see in any of these previous swings wider.
IG12 closed at its widest since 09/04 as the S&P fell notably back to 09/09 levels. We did find one interesting (think conspiracy theories) item for Q3 that both the S&P and Dow gained almost exactly 14.98% from close Q2 to close Q3 (seemed odd to us that two indices with very different components in terms of size and concentration as well as weighting methodology should have exactly the same return over that three-month period).
IG13 obviously closed at its contract wides and also underperformed intrinsics. For note, IG13 has traded for nine days, opened 9/21 at 96/97, traded as tight as 88/89 on 9/23, flatlined around 99/100 around the weekend, and is now 110.5bps offered. That is a 22.5bps swing in six days, seems that perhaps shorts are rolling after all. HY13 also closed (and traded intraday) at its lowest price of the contract as HY12 traded at its lowest price since 9/15 (clearly some room for deterioration over IG).
CIT was once again topic-du-jour although trading was relatively quiet in the single-name. HY13 intrinsics and index underperformed HY12 with HY13 breaking 750bps and HY12 trading at 700bps intraday. The relatively wide HY13 skew was compressed today which given the talk of a few lists flying around was driven by index arb (HY13 intrinsics were 35-40bps wider while the index only managed 20bps or so.
HVOL13 underperformed HVOL12 (despite the latter's CIT exposure) as we suspect investors followed risk aversion trades and used HVOL on-the-run as vehicle of choice (given its lower carry costs relative to HVOL12). Early in the day, IG and HY were in line but as the day wore on, HY started to underperform and at the same time IG was outperforming its intrinsics (s12 and s13).
This tells me that there was some movement towards the decompression trade (or more simply unwinding of the crowded compression trades). This was also evident as off-the-run indices underperformed significantly (unwinding of the roll trade?). HY-LCDX also compressed today quite a bit with HY12 edging back towards a 700bps close (and towards sub-100bps in the differential). On a side note, HY12-XOver11 was back up to 200bps (50bps wider in 3 days) as our favorite 'convoluted' trade HY-IG/XOver-Main jumped another 15bps to 175bps.
One other item we saw today was a continuation of the intrinsic curve flattening in IG12/13 while the index curves were steeper to unch. IG12 interestingly steepened more than IG13 today even as CIT's curve inverted further as we suspect that some of the 3s5s steepeners were unwound in IG12 which helped keep IG12 tighter than we would expect (given IG13's move and IG12's intrinsics). IG12-13 did decompress though on the day and we believe this trade ios worth sticking with.
ABX and CMBX prices dropped today for the second day in a row but notably all were weaker, there were no price improvements (and along with talk of regulators wanting to bring ABS prices into the TRACE methodology we wonder if there is some building fear of the real MtM for some of these instruments). Builders widened across all names (for the third day in a row) and this time stocks followed with high spread names underperforming.
Weak auto sales prompted significant mark-ups in auto and supplier spreads but it was financials that saw considerable selling pressure today. Monolines saw the largest absolute spread weakening as tail risk and counterparty risk seems to be being hedged aggressively but insurers were all wider (led by higher beta names like HIG and PRU). General finance names were weak as AIG/ILFC/CIT/SLM weakened and GECC jumped 30bps to 225bps on news of a possible NBC Universal sale to CMCSA (which was 10bps wider at 125bps) - we worry (as it seems do others) that GE is concentrating assets and not in the good stuff (i.e. financials making up more of the mix). Banks were weak with GS underperforming but CCard names (AXP and COF were notably weaker).
INDUstrials and CONSumers were again the weakest (but considerabl;y worse than yesterday) as surprisingly low beta underperformed high beta (thanks mainly to the weakness in the very low spread transports which lagged today). ENRG and TMT outperformed (though were 95% wider) thanks to a negligible improvement in VZ (offset by weakness in CMCSA for example of the CNBC deal). Interestingly DD and SHW bucked the INDUs trend and tightened today and we note that while ENRG names were less battered, the higher beta (NRUC, VLO, and APC) sold off pretty hard.
In other assets, gold slid but held above $1000 as oil was volatile but ended down only a smidge (though above $70). VIX and swaption vols were up notably but it was the TSY complex that was notable today. Dramatic drops in yields and curve flattening was evident as 2Y fell below 90bps, 10Y below 3.2% and some notable regimes in 2s5s, 2s10s, and 2s5s10s, were on the verge of breaking - all quite notably deflationary. The spread between 10Y TSY and 30Y MTH fell 4bps today back its lowest differential since 05/29 and one of the indicators we watch (inflation-swap adjusted 10Y rate) reached its lowest level since 5/10 (while the 10Y reached back to 5/20 levels). It would appear that perhaps the quarter-end has seen a shift in allocations of new fund flows as we see risk definitely off (at least for today).
Commentary Compliments of www.creditresearch.com
CDR LQD 50 NAIG +6.19bps to 88.93 (50 wider - 0 tighter <> 16 steeper - 34 flatter).
CDX13 IG +7.75bps to 110 ($0.05 to $99.59) (FV +5.99bps to 103.99) (119 wider - 4 tighter <> 49 steeper - 75 flatter) - Trend Wider.
CDX13 HVOL +16bps to 206 (FV +11.45bps to 197.18) (29 wider - 0 tighter <> 10 steeper - 20 flatter) - Trend Wider.
CDX13 ExHVOL +5.14bps to 79.68 (FV +4.32bps to 75.59) (90 wider - 5 tighter <> 56 steeper - 39 flatter).
CDX13 HY (30% recovery) Px $-0.87 to $90.63 / +25.7bps to 757.3 (FV +43.17bps to 669.98) (98 wider - 2 tighter <> 7 steeper - 93 flatter) - Trend Wider.
CDX12 IG +8.5bps to 119.75 ($-0.34 to $99.19) (FV +7.04bps to 115.46) (121 wider - 3 tighter <> 47 steeper - 77 flatter) - Trend Wider.
CDX12 HVOL +12.2bps to 241.9 (FV +14.72bps to 240.58) (30 wider - 0 tighter <> 8 steeper - 22 flatter) - Trend Wider.
CDX12 ExHVOL +7.33bps to 81.18 (FV +4.75bps to 78.14) (91 wider - 4 tighter <> 56 steeper - 39 flatter).
CDX11 XO +6.4bps to 281.4 (FV +24.83bps to 319.53) (31 wider - 2 tighter <> 6 steeper - 28 flatter) - Trend Wider.
CDX12 HY (30% recovery) Px $-0.81 to $92.88 / +23.1bps to 691.5 (FV +41.34bps to 651.59) (92 wider - 2 tighter <> 7 steeper - 87 flatter) - Trend Wider.
LCDX12 (65% recovery) Px $-1.03 to $97.6 / +32.71bps to 574.35 - Trend Wider.
MCDX12 +3bps to 93bps. - No Trend.
CDR Counterparty Risk Index rose 5.11bps (5.27%) to 102.07bps (14 wider - 0 tighter).
CDR Government Risk Index rose 0.99bps (2.4%) to 42.14bps..
DXY strengthened 0.65% to 77.15.
Oil fell $0.3 to $70.31.
Gold fell $9 to $998.7.
VIX increased 2.66pts to 28.27%.
10Y US Treasury yields fell 12.5bps to 3.18%.
S&P500 Futures lost 2.42% to 1027.4.