Daily Credit Summary: October 22 - Now You See It, Now You Don't

Spreads were tighter in the US as all the indices improved (moving credit back just wider than Tuesday's close while stocks are just higher than Tuesday's close). Today's prices action in credit saw narrow range inside days in both IG and HY suggesting short-term underperformance (reversals from the tightening trend), and while over the last two days equity and credit are close to unch, TSYs are notably higher/steeper in yield, the dollar a lot lower and gold and oil up as the vol term structure continues to steepen up with short-dated buy-writers seemingly ruling stock risk.

IG trades marginally tight (rich) to its 50d moving average at 101.5bps. IG has closed tighter on 18 days so far this year (210 trading days). The last five days have seen IG flat to its 50d moving average. Indices generally outperformed intrinsics with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but narrowed the skew, ExHVOL outperformed pushing the skew wider, HY outperformed but narrowed the skew.

8.8% of names in IG moved more than their historical vol would imply as higher vol names outperformed lower vol names by -1.13% to -0.84%. 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 Reynolds American Inc. (-16bps) pushing IG 0.12bps tighter, and Metlife, Inc. (+5bps) adding 0.04bps to IG. HVOL is more sensitive with Reynolds American Inc. pushing it 0.53bps tighter, and Metlife, Inc. contributing 0.18bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Valero Energy Corp. (-12.5bps) pushing the index 0.12bps tighter, and Hartford Financial Services Group (+5bps) adding 0.05bps to ExHVOL.

The price of investment grade credit rose 0.11% to around 100.04% of par, while the price of high yield credits rose 0.5% to around 94.38% of par. ABX market prices are lower by 0.24% of par or in absolute terms, 0.57%. Broadly speaking, CMBX market prices are higher (improving) by 0% of par or in absolute terms, 0%. Volatility (VIX) is down -1.53pts to 20.69%, with 10Y TSY selling off (yield rising) 3.5bps to 3.42% and the 2s10s curve steepened by 4.3bps, as the cost of protection on US Treasuries rose 1.5bps to 21.5bps. 2Y swap spreads widened 0.4bps to 36.25bps, as the TED Spread widened by 1.9bps to 0.24% and Libor-OIS deteriorated 0.2bps to 12.2bps.

The Dollar strengthened with DXY rising 0.13% to 75.07, Oil falling $0.12 to $81.25 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 0.16% today (a 0.02% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $0.18 to $1059.18 as the S&P rallies (1090.8 1.18%) outperforming IG credits (99bps 0.11%) while IG, which opened tighter at 101bps, underperforms HY credits. IG11 and XOver11 are -3bps and +6.62bps respectively while ITRX11 is +0.25bps to 84bps.

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 fell -1.9bps 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 23% 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 38%). The number of names wider than the index stayed at 45 as the day's range fell to 4bps (one-week average 4.3bps), between low bid at 98 and high offer at 102 and higher beta credits (-1.31%) outperformed lower beta credits (-0.92%).

In IG, wideners were outpaced by tighteners by around 2-to-1, with only 31 credits wider. By sector, CONS saw 24% names wider, ENRGs 12% names wider, FINLs 29% names wider, INDUs 19% names wider, and TMTs 38% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 86.63bps and the latter at 83.2bps.

Cross Market, we are seeing the HY-XOver spread compressing to 145.69bps from 166.43bps, and remains below the short-term average of 146.55bps, with the HY/XOver ratio falling to 1.29x, below its 5-day mean of 1.29x. The IG-Main spread compressed to 15bps from 17.75bps, but remains above the short-term average of 14.09bps, with the IG/Main ratio falling to 1.18x, above its 5-day mean of 1.17x.

In the US, non-financials underperformed financials as IG ExFINLs are tighter by 0.9bps to 83.2bps, with 60 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 2.48bps to 91.39bps, with Finance names (worst) tighter by 11.88bps to 663.25bps, Brokers (best) tighter by 6.5bps to 115.17bps, and Banks tighter by 6.32bps to 123.83bps. Monolines are trading tighter on average by -3785.02bps (9.06%) to 4123.7bps.

In IG, FINLs outperformed non-FINLs (1.43% tighter to 1.07% tighter respectively), with the former (IG FINLs) tighter by 2.7bps to 186.2bps, with 14 of the 21 names tighter. The IG CDS market (as per CDX) is 11.6bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (87.39bps), with the bond ETFs outperforming the IG CDS market by around 3.95bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 0.32bps to 86.63bps (with ITRX FINLs -trading sideways- better by 0 to 73.5bps) and is currently trading in the middle of the week's range at 43.5%, between 88.5 to 85.19bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading in the middle of the week's range at 28.3%, between 67.85 to 65.49bps. ExHVOL outperformed LoVOL as the differential compressed to 4.11bps from 5.92bps, but remains above the short-term average of 4.08bps. The Main exFINLS to IG ExHVOL differential decompressed to 16.37bps from 14.34bps, and remains above the short-term average of 15.92bps.

Commetary courtesy of www.creditresearch.com

Index/Intrinsics Changes (today)
CDR LQD 50 NAIG -2.21bps to 82.22 (13 wider - 27 tighter <> 30 steeper - 18 flatter).
CDX13 IG -3bps to 98.5 ($0.13 to $100.07) (FV -1.13bps to 100.25) (33 wider - 70 tighter <> 81 steeper - 40 flatter) - No Trend.
CDX13 HVOL -5bps to 190 (FV -3bps to 183.47) (10 wider - 18 tighter <> 18 steeper - 12 flatter) - Trend Wider.
CDX13 ExHVOL -2.37bps to 69.61 (FV -0.56bps to 74.78) (23 wider - 72 tighter <> 32 steeper - 63 flatter).
CDX13 HY (30% recovery) Px $+0.5 to $94.38 / -14.1bps to 649.7 (FV +1.97bps to 592.19) (44 wider - 44 tighter <> 42 steeper - 53 flatter) - Trend Wider.
LCDX12 (65% recovery) Px $+0.12 to $99.63 / -3.81bps to 538.02 - Trend Tighter.
MCDX12 +2bps to 92bps. - No Trend.
CDR Counterparty Risk Index fell 3.18bps (-3.39%) to 90.69bps (5 wider - 9 tighter).
CDR Government Risk Index rose 0.54bps (1.31%) to 42.02bps..
DXY strengthened 0.13% to 75.07.
Oil fell $0.16 to $81.21.
Gold rose $0.18 to $1059.18.
VIX fell 1.53pts to 20.69%.
10Y US Treasury yields rose 3.5bps to 3.42%.
S&P500 Futures gained 1.21% to 1091.1.