Daily Credit Summary: October 30 - Vermicious Knids
Spreads were broadly wider in the US as all the indices deteriorated (as IG and HY closed at their wides with the former making its largest jump wider since 10/01). IG trades 7.8bps wide (cheap) to its 50d moving average, which is a Z-Score of 1.3s.d.. At 109bps, IG has closed tighter on 63 days so far this year (217 trading days) and we note that the distance to the average is getting close to its largest since this rally began (a critical break over 9-10bps above the average would suggest we are in a new era. Yesterday's crack of IG not being able to break the 50-day average (while technical nonsense) is notable in that we have not seen an upside break and unsuccessful test of the average since the March rally began in credit.
Indices typically underperformed single-names with skews widening in general but were really just playing catchup from yesterday's moves as from Wednesday's close single-names are actually underperforming suggesting some more weakness is due in the indices. The names having the largest impact on IG are Constellation Energy Group Inc. (-22bps) pushing IG 0.17bps tighter, and International Lease Finance Corp. (+39.58bps) adding 0.25bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 0.42bps tighter, and International Lease Finance Corp. contributing 1.07bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Constellation Energy Group Inc. (-22bps) pushing the index 0.22bps tighter, and Wells Fargo & Company (+11.25bps) adding 0.12bps to ExHVOL.
Selling was broad-based today but we do note the lowest quality names saw the most selling pressure with CCC and below relatively crushed. There was also some notable selling in the crossover space as BBB-/BB+ names underperformed either side. Utilities (Eletric more than others) saw a safety bid today while Leisure (Gaming, Lodging, and Sports/Rec) were all weaker along with Autos and Builders. Capital Goods were mixed but Transports were very weak. Healthcare also saw a bid and was benefiting from the safety trade (particularly Hospitals & Health Services). Interestingly, Airlines saw some buying today also with UAL and AMR both tighter
The price of investment grade credit fell 0.27% to around 99.6% of par, while the price of high yield credits fell 1.315% to around 92.13% of par. ABX market prices are lower by 0.29% of par or in absolute terms, 0.65%. Broadly speaking, CMBX market prices are lower by 0.81% of par or in absolute terms, 0.26%. Volatility (VIX) is up 5.93pts to 30.75%, with 10Y TSY rallying (yield falling) 10.3bps to 3.4% and the 2s10s curve flattened by 2.4bps, as the cost of protection on US Treasuries fell 2.06bps to 21.865bps. 2Y swap spreads widened 1.9bps to 35bps, as the TED Spread widened by 0.6bps to 0.24% and Libor-OIS improved 0.1bps to 13bps.
The Dollar strengthened with DXY rising 0.65% to 76.408, Oil falling $2.9 to $76.97 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 3.44% today (a 2.98% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $2.1 to $1044.9 as the S&P is down (1032.3 -2.76%) underperforming IG credits (109bps -0.27%) while IG, which opened wider at 104bps, outperforms HY credits. IG11 and XOver11 are +5.38bps and +5.5bps respectively while ITRX11 is +3bps to 89.25bps.
Dispersion rose +2.2bps 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.
39% of IG credits are shifting by more than 3bps and 49% of the CDX universe are also shifting significantly (more than the 5 day average of 49%). The number of names wider than the index decreased by 1 to 43 as the day's range fell to 6.5bps (one-week average 6.2bps), between low bid at 103.5 and high offer at 110 and higher beta credits (2.81%) underperformed lower beta credits (2.06%).
In IG, wideners outpaced tighteners by around 3-to-1, with 90 credits wider. By sector, CONS saw 73% names wider, ENRGs 29% names wider, FINLs 86% names wider, INDUs 85% names wider, and TMTs 75% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 91.69bps and the latter at 89.34bps.
Cross Market, we are seeing the HY-XOver spread decompressing to 197.47bps from 165.11bps, and remains above the short-term average of 177.82bps, with the HY/XOver ratio rising to 1.38x, above its 5-day mean of 1.35x. The IG-Main spread decompressed to 19.75bps from 16.63bps, and remains above the short-term average of 17.9bps, with the IG/Main ratio rising to 1.22x, above its 5-day mean of 1.21x.
In the US, non-financials outperformed financials as IG ExFINLs are wider by 1.9bps to 89.3bps, with 25 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 3.06bps to 95.93bps, with Brokers (worst) wider by 7.92bps to 125bps, Finance names (best) tighter by 23.04bps to 697.02bps, and Banks wider by 6.36bps to 131.22bps. Monolines are trading wider on average by 2.86bps (0.42%) to 5312.11bps.
In IG, FINLs underperformed non-FINLs (2.78% wider to 2.19% wider respectively), with the former (IG FINLs) wider by 5.3bps to 195.9bps, with 2 of the 21 names tighter. The IG CDS market (as per CDX) is 20.9bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (88.07bps), with the bond ETFs outperforming the IG CDS market by around 4.15bps.
In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 2.63bps to 91.69bps (with ITRX FINLs -trending wider- weaker by 4.5 to 79.5bps) and is currently trading at the wides of the week's range at 76.85%, between 93.44 to 85.88bps, and is trading sideways. Main LoVOL (trend wider) is currently trading at the wides of the week's range at 95.3%, between 72.27 to 65.68bps. ExHVOL underperformed LoVOL as the differential decompressed to 10.51bps from 7.67bps, and remains above the short-term average of 8bps. The Main exFINLS to IG ExHVOL differential compressed to 9.22bps from 12.11bps, but remains below the short-term average of 12.3bps.
Quick October Thoughts
There was a lot of discussion of the October movements and we note that IG closed September at 102.25 and HY at $91.5. So the compression trade 'appears' to have worked during the month as IG is wider and HY higher in price (especially when you add in the carry). However, given the more delat-hedged compression HY-IG trade of between 3x and 6x (broad range but just as an idea if investors wanted DV01- and beta-neutrality), the 6bps widening in IG does not really cover the 18bps tightening in HY and when you consider the drop in carry from the more realistic 'hedged' compression trade, it was not a good month for the compression hunters. Add to this the very recent volatility in the HY-IG differential and we suggest that those in compression trades will be getting increasingly nervous.
As an aside, we also see intrinsics wider in both HY and IG over the month, so HY's move has compressed the skew on the month but signals more compression at play than outright buying and with the basis having compressed so dramatically in the last two weeks, we suspect that the reach for yield is done for now.
We also note that despite all the talk about the dollar-stocks relationship, DXY is actually lower on the month as stocks are lower on the month (reinforcing our view that this relationship is both asymmetric and more intraday momo than anything systemic). Gold and Oil up large on the month as TSYs have also been sold as single-name CDS wideners have outpaced tighteners by around 2-to-1 and low beta names have dramatically underperformed high beta.
ABX is a little better but CMBX a little lower in price as builders are considerably wider and REITs wider but less so. ENRG name outperformance on the month reflects the move to 'safety' as TMT and INDUstrials are underperforming on the month with CONSumers also weak.
Commentary compliments of www.creditresearch.com
Index/Intrinsics Changes (today)
CDR LQD 50 NAIG +3.6bps to 88.49 (41 wider - 3 tighter <> 17 steeper - 33 flatter).
CDX13 IG +5.12bps to 108 ($-0.22 to $99.65) (FV +2.61bps to 106.98) (94 wider - 20 tighter <> 43 steeper - 82 flatter) - Trend Wider.
CDX13 HVOL +10bps to 195 (FV +6.36bps to 195.55) (26 wider - 2 tighter <> 6 steeper - 24 flatter) - No Trend.
CDX13 ExHVOL +3.58bps to 80.53 (FV +1.46bps to 79.94) (68 wider - 27 tighter <> 58 steeper - 37 flatter).
CDX13 HY (30% recovery) Px $-1.35 to $92.09 / +38.9bps to 715 (FV +10.81bps to 641.36) (79 wider - 14 tighter <> 22 steeper - 76 flatter) - Trend Wider.
ITRX12 Main +3bps to 89.25 (FV +0.15bps to 84.87) (57 wider - 54 tighter <> 35 steeper - 89 flatter) - No Trend
ITRX12 HiVol +4bps to 144 (FV +0.48bps to 135.62) (17 wider - 10 tighter <> 6 steeper - 24 flatter) - No Trend
ITRX12 LoVol +2.68bps to 71.96 (FV +0.05bps to 69.19) (40 wider - 55 tighter <> 66 steeper - 29 flatter) - Sideways Trading
ITRX12 XOver +5.5bps to 516.5 (FV -9.21bps to 520.01) (16 wider - 27 tighter <> 19 steeper - 26 flatter) - Trend Wider
LCDX12 (65% recovery) Px $-0.7 to $98.65 / +22.6bps to 577.88 - Trend Wider.
MCDX12 +5bps to 105bps. - Trend Wider.
CDR Counterparty Risk Index rose 4.01bps (4.32%) to 96.88bps (10 wider - 4 tighter).
CDR Government Risk Index fell 0.39bps (-0.85%) to 45.85bps..
DXY strengthened 0.65% to 76.41.
Oil fell $2.83 to $77.04.
Gold fell $2.1 to $1044.9.
VIX increased 5.93pts to 30.69%.
10Y US Treasury yields fell 11.1bps to 3.39%.
S&P500 Futures lost 2.81% to 1031.8.