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Daily Credit Summary: October 15 - Upside Down
Spreads were broadly wider in the US as all the indices deteriorated (once again underperforming a relentless equity market). For the first day this year, IG4-13 all had upward sloping curves in 3s5s7s10s (notably IG8-11) as HY underperformed IG and rolls decompressed modestly. IG trades 4.3bps tight (rich) to its 50d moving average, which is a Z-Score of -0.7s.d.. At 97.5bps, IG (adjusted) has closed tighter on only 13 days so far this year (206 trading days). The last five days have seen IG diverging from its 50d moving average.
The equity-credit divergence remains with credit underperforming an exuberant equity market and with even HY losing some ground today, there is clearly some cognitive dissonance (one of our favorite phrases from earlier in the year) currently. Financials underperformed as FICC performance anxiety in the future coupled with worries over consumer credit from Citi saw most of the majors underperforming along with monolines and insurers (our perspective on the FICC strength is that it has been driven by Q1 AIG handouts, Q2 basis compression, and Q3 spread compression - all helping the opaque valuations of the massive inventories held on the bank books). With basis in IG narrow, HY relatively tight, and IG valuations not far off a V-shaped recovery, the easy money for banks with lack of transparency and balance sheets full of bonds and CDS has been made. The lower volumes and bid-offers that remain similar and perhaps a little lower are not enough to explain this performance even with easier competition (unless GS traders are the WDGann's of the 21st century and paid up for their crystal balls).
Indices generally outperformed intrinsics with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew, ExHVOL outperformed pushing the skew wider, HY's skew widened as it underperformed. 19.2% of names in IG moved more than their historical vol would imply as higher vol names underperformed lower vol names by 2.89% to 2.03%. IG's vol is around 4.38% per 1 day period, which leaves 98 names higher vol and 27 lower vol than the index.
The names having the largest impact on IG are International Paper Co. (-15.25bps) pushing IG 0.12bps tighter, and International Lease Finance Corp. (+84.5bps) adding 0.53bps to IG. HVOL is more sensitive with International Paper Co. pushing it 0.51bps tighter, and International Lease Finance Corp. contributing 2.25bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Transocean Ltd. (-3bps) pushing the index 0.03bps tighter, and UnitedHealth Group Inc (+12.38bps) adding 0.12bps to ExHVOL.
The price of investment grade credit rose 0.39% to around 100.16% of par, while the price of high yield credits fell 0.32% to around 94.31% of par. ABX market prices are higher (improving) by 0.01% of par or in absolute terms, 0.46%. Broadly speaking, CMBX market prices are unch today. Volatility (VIX) is down -1.14pts to 21.72%, with 10Y TSY selling off (yield rising) 4.3bps to 3.46% and the 2s10s curve steepened by 1.1bps, as the cost of protection on US Treasuries fell 0.34bps to 21.5bps. 2Y swap spreads widened 1.6bps to 38.13bps, as the TED Spread widened by 1.3bps to 0.23% and Libor-OIS improved 0bps to 12.8bps.
The Dollar weakened with DXY falling 0.15% to 75.44, Oil rising $2.42 to $77.6 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 4.42% today (a 3.07% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $12.2 to $1050.2 as the S&P rallies (1091.6 0.36%) outperforming IG credits (96bps 0.39%) while IG, which opened tighter at 95bps, outperforms HY credits. IG11 and XOver11 are -0.25bps and +2.5bps respectively while ITRX11 is +1.5bps to 83.25bps.
The majority of credit curves steepened 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), and additionally the ratio has dropped below 0.9x which is exceptionally bearish for stocks and spreads.
Dispersion rose +6.5bps in IG. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion decreasing more than expected today indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads.
30% of IG credits are shifting by more than 3bps and 45% of the CDX universe are also shifting significantly (more than the 5 day average of 43%). The number of names wider than the index increased by 2 to 47 as the day's range rose to 4.5bps (one-week average 4.2bps), between low bid at 94 and high offer at 98.5 and higher beta credits (1.76%) outperformed lower beta credits (3.27%).
In IG, wideners outpaced tighteners by around 6-to-1, with 99 credits wider. By sector, CONS saw 84% names wider, ENRGs 56% names wider, FINLs 81% names wider, INDUs 74% names wider, and TMTs 92% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 85.31bps and the latter at 82.08bps.
Cross Market, we are seeing the HY-XOver spread decompressing to 142.88bps from 136.42bps, but remains above the short-term average of 129bps, with the HY/XOver ratio rising to 1.28x, above its 5-day mean of 1.24x. The IG-Main spread compressed to 12.75bps from 13.75bps, but remains above the short-term average of 11.67bps, with the IG/Main ratio falling to 1.15x, above its 5-day mean of 1.13x.
In the US, non-financials outperformed financials as IG ExFINLs are wider by 2bps to 82.1bps, with 14 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 1.94bps to 98.4bps, with Brokers (worst) wider by 4.83bps to 133bps, Banks (best) wider by 1bps to 136.33bps, and Finance names wider by 31.01bps to 716.71bps. Monolines are trading wider on average by 610.45bps (4.94%) to 5930.91bps.
In IG, FINLs underperformed non-FINLs (3.31% wider to 2.47% wider respectively), with the former (IG FINLs) wider by 6.3bps to 195.5bps, with 2 of the 21 names tighter. The IG CDS market (as per CDX) is 4.6bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (91.4bps), with the bond ETFs outperforming the IG CDS market by around 3.49bps.
In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 1.75bps to 85.31bps (with ITRX FINLs -trending tighter- weaker by 0.5 to 75bps) and is currently trading tight to its week's range at 13.46%, between 96.56 to 83.56bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at 11.09%, between 73.96 to 65.14bps. ExHVOL outperformed LoVOL as the differential compressed to 3.36bps from 3.67bps, but remains above the short-term average of 1.29bps. The Main exFINLS to IG ExHVOL differential decompressed to 15.84bps from 14.74bps, but remains below the short-term average of 19.47bps.
Commentary compliments of www.creditresearch.com
Index/Intrinsics Changes
CDR LQD 50 NAIG +2.13bps to 85.16 (43 wider - 4 tighter <> 28 steeper - 22 flatter).
CDX13 IG +0.5bps to 96 ($0.39 to $100.16) (FV +2.68bps to 100.71) (99 wider - 16 tighter <> 78 steeper - 47 flatter) - Trend Tighter.
CDX13 HVOL 0bps to 180 (FV +4.59bps to 190.23) (22 wider - 4 tighter <> 18 steeper - 12 flatter) - Trend Tighter.
CDX13 ExHVOL +0.66bps to 69.47 (FV +2.11bps to 73.41) (77 wider - 18 tighter <> 35 steeper - 60 flatter).
CDX13 HY (30% recovery) Px $-0.32 to $94.31 / +9bps to 651.9 (FV +3.49bps to 606.11) (66 wider - 29 tighter <> 43 steeper - 54 flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $+0.23 to $99.5 / -7.25bps to 549.75 - Trend Tighter.
MCDX12 -1.2bps to 87.8bps. - No Trend.
CD Counterparty Risk Index rose 1.94bps (2.01%) to 98.4bps (12 wider - 2 tighter).
CDR Government Risk Index fell 0.93bps (-2.2%) to 41.33bps..
DXY weakened 0.15% to 75.44.
Oil rose $2.42 to $77.6.
Gold fell $12.2 to $1050.2.
VIX fell 1.14pts to 21.72%.
10Y US Treasury yields rose 4.3bps to 3.46%.
S&P500 Futures gained 0.36% to 1091.6.
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What?
M2 down $23.3b this week.
$2.7 billion of QE left.
Seconded once again. Please keep this series.
agree.
This is what originally made sure I remembered to check this blog every day, after market close.
Same for me, although, I confess that I am most interested in the DXY, oil and VIX.