Daily Credit Summary: October 28 - Banks, Builders And Bailouts
Spreads were broadly wider in the US as all the indices deteriorated (moving to their widest levels since 10/02). Curves were modestly flatter but roll trades saw significant decompression (both in HY and IG) especially between series 9 and 12/13. At 109bps, IG is within 1bps of its widest close since 09/04 (as we note intraday wides of almost 115bps as a significant eye-ball level for many to watch).
IG trades 7.8bps wide (cheap) to its 50d moving average, which is a Z-Score of 1.3s.d (which is the biggest move through the average in six months). At 109bps, IG has closed tighter on 62 days so far this year (215 trading days). The last five days have seen IG diverging bearishly from its 50d moving average. As an aside, the recent swings in IG (adjusted on-the-run) were from an intraday peak at 114.875 on 10/2 down to an intraday trough at 94bps on 10/15 and now back up to 109bps. Therefore, this most recent sell-off is slower in pace than the capitulative rally (from what seemed a drama-ridden sell-off to that intraday peak thanks to CIT stress) we saw in the first two weeks of Oct.
IG10 joined IG9 today with its 5s10s curve inverting once again and we saw 3s5s flattening a little more in IG13 as IG13 3Y intrinsics underperformed the rest of the curve. Some other notable index RV moves today were the HY9 7Y and HY13 5Y compressed to zero (from over 35bps late last week), Main12 moved back above 90bps (after defending that level for much of the day) as XOver12 has notably underperformed (suggesting compression trade unwinds en masse), HY13-IG13 broke back above 600bps, ITRX FINLs Sen-Sub differential broke back above 50bps, and HVOL9 7Y to HVOL13 5Y moved back above 160bps (10bps wider today). It would appear that notably the last point was evident as HVOL13 outperformed intrinsics and off-the-runs dramatically as we see a move to decompression and roll unwinds.
Indices generally outperformed intrinsics with skews widening in general as IG outperformed but narrowed the skew, HVOL outperformed but widened the skew, ExHVOL's skew widened as it underperformed, HY outperformed but narrowed the skew.
One other item of note is that IG has now made wider tights and wider wides intraday for three days-in-a-row, which led to a short-term peak in spreads on 10/2, 9/2, and 6/23 so empirically we might expect a pause here. However, we suggest that if we see spreads push higher making wider tights and wider wides for more days then this could be a signal that this decompression is more than a trade. It appears that GDP will be the driver of any leg wider from here (if we miss) but we suspect that compression will be less likely on any GDP beat as recent macro data suggests one-off rather than sustainable recovery for now.
A solid 36.8% of names in IG moved more than their historical vol would imply as higher vol names underperformed lower vol names by 5.17% to 4.16%. 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 United Parcel Service Inc. (-1bps) pushing IG 0.01bps tighter, and American International Group, Inc. (+75.63bps) adding 0.48bps to IG. HVOL is more sensitive with Home Depot Inc. pushing it 0bps tighter, and American International Group, Inc. contributing 2.06bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both United Parcel Service Inc. (-1bps) pushing the index 0.01bps tighter, and Valero Energy Corp. (+13.5bps) adding 0.13bps to ExHVOL. [We also note that CIT ended the day 100bps wider as the revolver extension seemed to be ignored by credit markets as nothing but a snub to Icahn; also the GMAC/RESCAP moves were dramatic after they got their $2.9bn TLGP issue off - we note that the GMAC-RESCAP spread recahed 1350bps recently (dramatically wider in a quick period) and we suspect that this 550bps plus rally in RESCAP is as much as about a busted compression trade as it is any sentiment improvements - look for a 500-600bps differential for any entry as a fllor level for a decompression trade].
The price of investment grade credit fell 0.2% to around 99.6% of par, while the price of high yield credits fell 1.07% to around 91.81% of par. ABX market prices are lower by 0.18% of par or in absolute terms, 0.26%. Broadly speaking, CMBX market prices are unch on average. Volatility (VIX) is up 3.08pts to 27.91%, with 10Y TSY rallying (yield falling) 3.6bps to 3.41% and the 2s10s curve flattened by 4.7bps, as the cost of protection on US Treasuries rose 1.72bps to 23.5bps. 2Y swap spreads tightened 5.9bps to 32.31bps, as the TED Spread widened by 1.2bps to 0.22% and Libor-OIS deteriorated 1bps to 13.3bps.
The Dollar strengthened with DXY rising 0.44% to 76.469, Oil falling $2.36 to $77.19 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 1.79% today (a 2.53% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $12.45 to $1027.6 as the S&P is down (1038.6 -2.06%) underperforming IG credits (109bps -0.2%) while IG, which opened tighter at 104.5bps, outperforms HY credits. IG11 and XOver11 are +5.06bps and +28.75bps respectively while ITRX11 is +4bps to 90.5bps.
Dispersion rose +7.5bps 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.
58% of IG credits are shifting by more than 3bps (the largest in several weeks) and 64% of the CDX universe are also shifting significantly (more than the 5 day average of 40%). The number of names wider than the index increased by 1 to 42 as the day's range rose to 6bps (one-week average 5bps), between low bid at 103.5 and high offer at 109.5 and higher beta credits (4.65%) outperformed lower beta credits (5.13%).
In IG, wideners outpaced tighteners by around 30-to-1, with 118 credits wider. By sector, CONS saw 92% names wider, ENRGs 100% names wider, FINLs 95% names wider, INDUs 92% names wider, and TMTs 96% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 93.38bps and the latter at 88.59bps.
Cross Market, we are seeing the HY-XOver spread decompressing to 187.56bps from 185.22bps, but remains above the short-term average of 168.52bps, with the HY/XOver ratio falling to 1.35x, above its 5-day mean of 1.33x. The IG-Main spread decompressed to 18.5bps from 18bps, but remains above the short-term average of 17.2bps, with the IG/Main ratio falling to 1.2x, above its 5-day mean of 1.2x.
In the US, non-financials outperformed financials as IG ExFINLs are wider by 3.5bps to 88.6bps, with 1 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 6.96bps to 95.5bps, with Brokers (worst) wider by 15.33bps to 126bps, Finance names (best) wider by 46.62bps to 722.64bps, and Banks wider by 12.29bps to 132.47bps. Monolines are trading wider on average by 219.28bps (5.48%) to 5148.44bps.
In IG, FINLs underperformed non-FINLs (6.35% wider to 4.12% wider respectively), with the former (IG FINLs) wider by 11.7bps to 196.7bps, with 0 of the 21 names tighter. The IG CDS market (as per CDX) is 15.5bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (93.5bps), with the bond ETFs underperforming the IG CDS market by around 3.85bps.
In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 3.81bps to 93.38bps (with ITRX FINLs -trending wider- weaker by 4.78 to 79bps) and is currently trading at the wides of the week's range at 100%, between 93.38 to 85.88bps, and is trending wider. Main LoVOL (trend wider) is currently trading at the wides of the week's range at 100.03%, between 72.34 to 65.68bps. ExHVOL underperformed LoVOL as the differential decompressed to 9.5bps from 6.79bps, but remains above the short-term average of 6.53bps. The Main exFINLS to IG ExHVOL differential compressed to 11.54bps from 13.65bps, but remains below the short-term average of 13.98bps.
Commentary compliments of www.creditresearch.com
CDR LQD 50 NAIG +5.31bps to 88.04 (50 wider - 0 tighter <> 18 steeper - 32 flatter).
CDX13 IG +4.5bps to 109 ($-0.2 to $99.6) (FV +5bps to 106.52) (118 wider - 4 tighter <> 46 steeper - 79 flatter) - Trend Wider.
CDX13 HVOL -0bps to 195 (FV +10.41bps to 195.67) (29 wider - 0 tighter <> 12 steeper - 18 flatter) - Trend Wider.
CDX13 ExHVOL +6.55bps to 82.47 (FV +3.35bps to 79.32) (89 wider - 6 tighter <> 61 steeper - 34 flatter).
CDX13 HY (30% recovery) Px $-1 to $91.88 / +29.1bps to 721.3 (FV +43.56bps to 648.22) (97 wider - 3 tighter <> 10 steeper - 90 flatter) - Trend Wider.
LCDX12 (65% recovery) Px $-0.73 to $98.44 / +23.56bps to 580.55 - Trend Wider.
MCDX12 +14bps to 108bps. - Trend Wider.
CDR Counterparty Risk Index rose 6.96bps (7.87%) to 95.5bps (14 wider - 0 tighter).
CDR Government Risk Index rose 2.01bps (4.73%) to 44.54bps..
DXY strengthened 0.51% to 76.53.
Oil fell $2.33 to $77.22.
Gold fell $12.35 to $1027.7.
VIX increased 3.08pts to 27.91%.
10Y US Treasury yields fell 3.6bps to 3.41%.
S&P500 Futures lost 2.06% to 1038.6.