Daily Credit Summary: October 13 - In Advance Of i7 Sales
Spreads were tighter in the US as all the indices improved albeit marginally as intraday ranges remained very low (but equity is still the dramatic outperformer of the last two weeks or so as IG experiences its longest period of low volatility since August of 2008). IG trades 1.5bps tight (rich) to its 50d moving average, which is a Z-Score of -0.2s.d.. At 100.5bps, IG has closed tighter on only 19 days so far this year (204 trading days). The last five days have seen IG flat to its 50d moving average.
SPY pushed to 2009 highs after hours on the INTC beat but IG did not move much (maybe 1bp tighter) and with VIX < 23% and SPY at highs, credit is considerably cheap (even adjusting for some of the dispersion across indices) as our bottom-up models also point to credit cheapness or equity richness currently and with OPEX Friday we do not put much weight into this week's VIX as it dramatically drops relative to VXV.
IG12x13 decompressed modestly as tails widened (dragged by CIT weakness) with IG13 outperforming IG9 (off-the-runs). Indices generally outperformed intrinsics with skews mostly narrower as IG outperformed but narrowed the skew, HVOL outperformed but narrowed the skew, ExHVOL outperformed pushing the skew wider, HY outperformed but narrowed the skew.
A minuscule 2.4% of names in IG moved more than their historical vol would imply as higher vol names outperformed lower vol names by -0.63% to -0.11%. IG's vol is around 6.19% per 2 day period, which leaves 98 names higher vol and 27 lower vol than the index.
The names having the largest impact on IG are Johnson Controls Inc (-8.27bps) pushing IG 0.07bps tighter, and International Lease Finance Corp. (+37.86bps) adding 0.24bps to IG. HVOL is more sensitive with Johnson Controls Inc pushing it 0.28bps tighter, and International Lease Finance Corp. contributing 1.04bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Black & Decker Corporation (-6bps) pushing the index 0.06bps tighter, and Time Warner Cable Inc. (+7bps) adding 0.07bps to ExHVOL.
The price of investment grade credit rose 0.46% to around 99.99% of par, while the price of high yield credits rose 0.495% to around 93.5% of par. ABX market prices are higher (improving) by 0.07% of par or in absolute terms, 0.6%. Broadly speaking, CMBX market prices are higher (improving) by 0.53% of par or in absolute terms, 0.15%. Volatility (VIX) is down -0.13pts to 22.99%, with 10Y TSY rallying (yield falling) 3.7bps to 3.35% and the 2s10s curve steepened by 2.8bps, as the cost of protection on US Treasuries fell 0.38bps to 21.5bps. 2Y swap spreads widened 0.5bps to 36.63bps, as the TED Spread widened by 0.5bps to 0.23% and Libor-OIS deteriorated 0.8bps to 13.1bps.
The Dollar weakened with DXY falling 0.72% to 75.879, Oil rising $2.47 to $74.24 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 2.04% today (a 2.72% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $14.45 to $1063.7 as the S&P rallies (1068.8 0.07%) outperforming IG credits (100.25bps 0.46%) while IG, which opened tighter at 98.5bps, underperforms HY credits. IG11 and XOver11 are -1.5bps and -25.46bps respectively while ITRX11 is -4.35bps to 86.5bps.
The majority of credit curves flattened as the vol term structure steepened with VIX/VIXV decreasing implying a more bearish/more volatile short-term outlook (normally indicative of short-term spread decompression expectations).
Dispersion rose +12.1bps 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 increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.
Only 19% of IG credits are shifting by more than 3bps and 39% of the CDX universe are also shifting significantly (less than the 5 day average of 43%). The number of names wider than the index increased by 1 to 42 as the day's range rose to 4bps (one-week average 4.39bps), between low bid at 107.25 and high offer at 111.25 and higher beta credits (-0.06%) underperformed lower beta credits (-0.57%).
In IG, tighteners outpaced wideners by around 1.7-to-1, with 41 credits notably wider. By sector, CONS saw 24% names wider, ENRGs 19% names wider, FINLs 43% names wider, INDUs 36% names wider, and TMTs 43% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 90.63bps and the latter at 84.65bps.
Cross Market, we are seeing the HY-XOver spread decompressing to 127.45bps from 116.1bps, and remains above the short-term average of 119.47bps, with the HY/XOver ratio rising to 1.23x, above its 5-day mean of 1.21x. The IG-Main spread decompressed to 13.75bps from 11.36bps, but remains above the short-term average of 11.14bps, with the IG/Main ratio rising to 1.16x, above its 5-day mean of 1.12x.
In the US, non-financials outperformed financials as IG ExFINLs are tighter by 0.6bps to 81.4bps, with 62 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 1.39bps to 99.99bps, with Finance names (worst) wider by 19.17bps to 714.29bps, Brokers (best) tighter by 1.84bps to 132.67bps, and Banks tighter by 0.67bps to 137.19bps. Monolines are trading tighter on average by -192.74bps (0.51%) to 5249.64bps.
In IG, FINLs underperformed non-FINLs (0.88% wider to 0.71% tighter respectively), with the former (IG FINLs) wider by 1.7bps to 191bps, with 9 of the 21 names tighter. The IG CDS market (as per CDX) is 2.7bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (97.51bps), with the bond ETFs underperforming the IG CDS market by around 2.64bps. This is an important shift and as LQD has underperformed HYG recently and LQD NAVs remain rich to its price, we suspect that the lagging flow into HYG will stall next (given HY stability over the last two weeks and less sensitivity to TSY levels).
In Europe, ITRX Main ex-FINLs (outperforming FINLs) rallied 4.69bps to 88.5bps (with ITRX FINLs -trading sideways- better by 3 to 78.5bps) and is currently trading tight to its week's range at 0%, between 96.56 to 88.5bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading tight to its week's range at -0.06%, between 73.96 to 68.03bps. ExHVOL underperformed LoVOL as the differential decompressed to 2.93bps from 1.47bps, but remains above the short-term average of 0.44bps. The Main exFINLS to IG ExHVOL differential compressed to 17.54bps from 20.28bps, but remains below the short-term average of 21.66bps.
Commentary compliments of www.creditresearch.com
CDR LQD 50 NAIG -0.4bps to 84.89 (17 wider - 28 tighter <> 24 steeper - 26 flatter).
CDX13 IG -2.21bps to 100 ($0.47 to $100) (FV -0.25bps to 99.43) (37 wider - 73 tighter <> 61 steeper - 64 flatter) - No Trend.
CDX13 HVOL -2bps to 193 (FV +0.08bps to 188.49) (7 wider - 22 tighter <> 15 steeper - 15 flatter) - Trend Tighter.
CDX13 ExHVOL -2.28bps to 70.63 (FV -0.35bps to 72.24) (30 wider - 65 tighter <> 49 steeper - 46 flatter).
CDX13 HY (30% recovery) Px $+0.5 to $93.5 / -14.1bps to 674.2 (FV -5.75bps to 619.61) (28 wider - 68 tighter <> 48 steeper - 50 flatter) - Trend Tighter.
CDX12 IG -1.75bps to 109.5 ($0.08 to $99.61) (FV +0.47bps to 110.87) (42 wider - 70 tighter <> 59 steeper - 66 flatter) - No Trend.
CDX12 HVOL -1.7bps to 245.4 (FV +3.23bps to 235.37) (11 wider - 19 tighter <> 11 steeper - 19 flatter) - Trend Wider.
CDX12 ExHVOL -1.77bps to 66.58 (FV -0.35bps to 73.73) (31 wider - 64 tighter <> 47 steeper - 48 flatter).
CDX11 XO -2.7bps to 257.1 (FV -3.3bps to 285.28) (9 wider - 22 tighter <> 16 steeper - 18 flatter) - Trend Tighter.
CDX12 HY (30% recovery) Px $+0.38 to $95.5 / -10.3bps to 618.5 (FV -6.35bps to 603.96) (27 wider - 63 tighter <> 46 steeper - 46 flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $-0.01 to $98.4 / +0.38bps to 548.98 - No Trend.
MCDX12 -2bps to 88bps. - No Trend.
CDR Counterparty Risk Index fell 1.26bps (-1.24%) to 100.12bps (1 wider - 13 tighter).
CDR Government Risk Index fell 0.14bps (-0.33%) to 42.29bps..
DXY weakened 0.72% to 75.88.
Oil rose $2.47 to $74.24.
Gold rose $14.45 to $1063.7.
VIX fell 0.13pts to 22.99%.
10Y US Treasury yields fell 3.2bps to 3.35%.
S&P500 Futures gained 0.07% to 1068.8.