Daily Credit Summary: October 20 - CAT and Dogs

Spreads were broadly wider in the US as all the indices deteriorated (with IG just underperforming HY as intraday ranges remained low but sentiment was definitely more skewed to the widening side). The last week or so has seen a shift in the relative-strength between debt, equity, and vol and based on this we would expect HY-IG decompression in the short-term and equities to underperform credit here (for equity guys a sell the rally rather than buy the dips mentality in stocks short-term).

IG trades 3.8bps tight (rich) to its 50d moving average, which is a Z-Score of -0.6sd. At 98bps, IG has closed tighter on only 15 days so far this year (209 trading days) but closes today at the top of the day's range and its widest since 10/13. The last five days have seen IG flat to its 50d moving average.

Notably IG9 did see its 5s10s curve flatten back to inverted intraday and some notable index moves include XOver12 back below 500bps, HY-XOver back above 150bps, HY-IG back above 550bps, and HY-LCDX holding above 100bps still. IG13 5Y vs IG9 7Y compressed to 40bps and will likely be the next of our low cost long vol plays as technicals pressure IG9 and fundamentals hold intrinsics wide.

Overall, high and low beta names were equally improving on the day but it was the higher beta FINLs that were the best performers as perhaps a flight to FINL safety trade was on with most of the majors outperforming. AIG/ILFC improved as did other tail names with IG9 outperforming IG12/13, IG12x13 compressing a smidge, and on-the-run curve steepening continuing. Indices typically underperformed single-names with skews mostly narrower as IG underperformed but narrowed the skew, HVOL underperformed but narrowed the skew, ExHVOL intrinsics beat and narrowed the skew, HY's skew widened as it underperformed.

7.2% of names in IG moved more than their historical vol would imply as higher vol names outperformed lower vol names by -0.88% to -0.58%. 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 Lease Finance Corp. (-69.62bps) pushing IG 0.44bps tighter, and DirecTV Holdings LLC (+7bps) adding 0.05bps to IG. HVOL is more sensitive with International Lease Finance Corp. pushing it 1.87bps tighter, and DirecTV Holdings LLC contributing 0.23bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Caterpillar Inc. (-8bps) pushing the index 0.08bps tighter, and Constellation Energy Group Inc. (+6.54bps) adding 0.06bps to ExHVOL.

The price of investment grade credit fell 0.13% to around 100.07% of par, while the price of high yield credits fell 0.12% to around 94.38% of par. ABX market prices are higher (improving) by 0.5% of par or in absolute terms, 2.69%. Broadly speaking, CMBX market prices are higher (improving) by 0% of par or in absolute terms, 0%. Volatility (VIX) is down -0.59pts to 21.03%, with 10Y TSY rallying (yield falling) 5.2bps to 3.34% and the 2s10s curve flattened by 1.2bps, as the cost of protection on US Treasuries fell 1.1bps to 20.5bps. 2Y swap spreads tightened 1.2bps to 36.13bps, as the TED Spread tightened by 1.3bps to 0.21% and Libor-OIS deteriorated 0.8bps to 11.6bps.

The Dollar strengthened with DXY rising 0.05% to 75.549, Oil falling $0.52 to $79.09 (underperforming the dollar as the value of Oil (rebased to the value of gold) rose by 0.2% today (a 0.6% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $9.1 to $1055.1 as the S&P is down (1088.2 -0.27%) underperforming IG credits (98.5bps -0.11%) while IG, which opened tighter at 96bps, outperforms HY credits. IG12 and XOver12 are +1.5bps and -5.75bps respectively while ITRX12 is +0.5bps to 83.75bps.

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), and additionally the ratio has dropped below 0.9x which is exceptionally bearish for stocks and spreads.

Dispersion fell -6.3bps 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 increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.

Only 21% of IG credits are shifting by more than 3bps and 36% of the CDX universe are also shifting significantly (less than the 5 day average of 42%). The number of names wider than the index decreased by 1 to 45 as the day's range rose to 5bps (one-week average 4bps), between low bid at 94 and high offer at 99 and higher beta credits (-0.87%) outperformed lower beta credits (-0.79%).

In IG, tighteners outpaced wideners by around 3-to-1, with only 29 credits notably wider. By sector, CONS saw 16% names wider, ENRGs 47% names wider, FINLs 19% names wider, INDUs 23% names wider, and TMTs 21% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 86.31bps and the latter at 82.6bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 150bps from 140.91bps, but remains above the short-term average of 139.14bps, with the HY/XOver ratio rising to 1.3x, above its 5-day mean of 1.27x. The IG-Main spread decompressed to 14.75bps from 12.75bps, and remains above the short-term average of 13.28bps, with the IG/Main ratio rising to 1.18x, above its 5-day mean of 1.16x.

In the US, non-financials underperformed financials as IG ExFINLs are tighter by 0.5bps to 82.6bps, with 59 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 2.27bps to 94.31bps, with Finance names (worst) tighter by 10.71bps to 686.78bps, Brokers (best) tighter by 4.42bps to 122.92bps, and Banks tighter by 2.71bps to 130.62bps. Monolines are trading wider on average by 524.55bps (2.85%) to 6787.5bps.

In IG, FINLs outperformed non-FINLs (2.7% tighter to 0.65% tighter respectively), with the former (IG FINLs) tighter by 5.3bps to 191.2bps, with 13 of the 21 names tighter. The IG CDS market (as per CDX) is 4.7bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (93.77bps), with the bond ETFs outperforming the IG CDS market by around 4.33bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 0.9bps to 86.31bps (with ITRX FINLs -trading sideways- better by 1.13 to 73.5bps) and is currently trading in the middle of the week's range at 55.67%, between 88.5 to 83.56bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading in the middle of the week's range at 50.52%, between 67.91 to 65.14bps. ExHVOL underperformed LoVOL as the differential decompressed to 4.64bps from 3.99bps, but remains above the short-term average of 3.47bps. The Main exFINLS to IG ExHVOL differential compressed to 15.13bps from 15.94bps, but remains below the short-term average of 16.22bps.

Commentary compliments of www.creditresearch.com

Index/Intrinsics Changes
CDR LQD 50 NAIG -1.16bps to 83.8 (11 wider - 30 tighter <> 17 steeper - 31 flatter).
CDX13 IG +2.5bps to 98.5 ($-0.11 to $100.07) (FV -1.34bps to 100.46) (32 wider - 69 tighter <> 58 steeper - 62 flatter) - No Trend.
CDX13 HVOL +5bps to 185 (FV -4.21bps to 186.84) (5 wider - 18 tighter <> 17 steeper - 13 flatter) - No Trend.
CDX13 ExHVOL +1.71bps to 71.18 (FV -0.46bps to 74.06) (27 wider - 68 tighter <> 54 steeper - 41 flatter).
CDX13 HY (30% recovery) Px $-0.19 to $94.31 / +5.3bps to 651.5 (FV -7.2bps to 588.26) (20 wider - 67 tighter <> 51 steeper - 48 flatter) - Trend Wider.
LCDX12 (65% recovery) Px $-0.05 to $99.47 / +1.62bps to 543.36 - Trend Tighter.
MCDX12 0bps to 89.5bps. - No Trend.
CDR Counterparty Risk Index fell 2.22bps (-2.3%) to 94.36bps (0 wider - 14 tighter).
CDR Government Risk Index fell 0.02bps (-0.04%) to 41.32bps..
DXY strengthened 0.05% to 75.55.
Oil fell $0.52 to $79.09.
Gold fell $8.4 to $1055.8.
VIX fell 0.59pts to 20.9%.
10Y US Treasury yields fell 4.9bps to 3.34%.
S&P500 Futures lost 0.16% to 1089.4. (based on Bloomberg's closing data - though SPX was -0.6%)

Comments

[Commander Cody]

And let's not forget that CAT absolutely blew away earnings expectations with 53% lower 3rd qtr net income yoy.  Was that the CAT in CAT and Dog?

[Cognitive Dissonance]

They lower the bar weekly to the point where a 5 year old could hurdle it and then declare a huge beat.

Even then, the only way they do beat is by moving everything but the CEO's salary into the non reoccurring category (I love it when Becky Quick says "ex") and thus "backed out" from being counted against the lowered expectations.

What a numbers racket. And everyone plays along. We are so phucked.