Daily Credit Summary: October 5 - Brokebanks Mounting
Spreads were tighter in the US today as all the indices improved (amid low volume and small intraday ranges as HY outperformed IG notably) with single-names generally following the indices lead (and performing in line with their weightings except AIG/ILFC which modestly outperformed). IG remained wide of Thursday's tightest levels while HY is now trading tighter than those tights as we note HY ebullience since the gap weaker open on Friday seems very blinkered (SPY is +2.3%, IG +0.65%, and HY +3.9% from that open).
Indices typically underperformed single-names with skews mostly narrower as it appeared that single-names were simply following the indices lead today (with most moves in line with index weightings except in AIG/ILFC). Cap Goods and Con Cycs remain extremely rich relative to other non-financials sectors and although financials led performance early on in credit (and all day in equities) thanks to a well-timed GS call, they ended the day underperforming as ENRG names were best (hardly a resounding positive for the markets). The evaporation of the DIF combined with Bair's call for an end to TBTF did nothing to dampen the big boys fun but the strength in the major financials was more than healthily reflected in the performance of the monolines and insurers today even as expectations of more banks blowing out is clearly rising.
IG12 trades 0.6bps tight (rich) to its 50d moving average, which is a Z-Score of -0.1s.d. At 112bps, IG12 has closed tighter on 20 days so far this year (198 trading days) although we note that HY12 remains over 4pts above its 50d average. Perhaps today's new issues predominatly in 30Y and LQD-TLH covergence with IG bond spreads is a pre-cursor to corporate bond flows drying up (especially seeing the reach for yield/levering in duration of new issues, basis compression, and demaqnd for the TIPS auction today).
The names having the largest impact on IG are American International Group, Inc. (-76.01bps) pushing IG 0.49bps tighter, and Universal Health Services Inc (+2.5bps) adding 0.02bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 2.12bps tighter, and MDC Holdings Inc contributing 0bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Textron Financial Corp (-18.5bps) pushing the index 0.2bps tighter, and Universal Health Services Inc (+2.5bps) adding 0.03bps to ExHVOL.
The price of investment grade credit rose 0.18% to around 99.51% of par, while the price of high yield credits rose 1.345% to around 94.88% of par. ABX market prices are higher (improving) by 0.18% of par or in absolute terms, 0.25%. Broadly speaking, CMBX market prices are higher (improving) by 1.5% of par or in absolute terms, 0.41%. Volatility (VIX) is down -1.84pts to 26.84%, with 10Y TSY rallying (yield falling) 0.5bps to 3.22% and the 2s10s curve flattened by 0.5bps, as the cost of protection on US Treasuries fell 0.94bps to 22.5bps. 2Y swap spreads tightened 0.7bps to 34.94bps, as the TED Spread widened by 0.3bps to 0.2% and Libor-OIS deteriorated 0.2bps to 13.1bps.
The Dollar weakened with DXY falling 0.44% to 76.665, Oil rising $0.43 to $70.38 (outperforming the dollar as the value of Oil (rebased to the value of gold) fell by 0.8% today (a 0.17% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $14.3 to $1017.1 as the S&P rallies (1036.7 1.47%) outperforming IG credits (112bps 0.18%) while IG, which opened tighter at 114.25bps, underperforms HY credits. IG11 and XOver12 are -4.4bps and -22.75bps respectively while ITRX12 is -5.51bps to 92.5bps.
Dispersion fell 5.1bps in IG. Broad market dispersion is less than historically expected given current spread levels, pointing to a more sanguine view of credits as investors discriminate less between names, with dispersion increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.
50% of IG credits are shifting by more than 3bps and 59% of the CDX universe are also shifting significantly (more than the 5 day average of 56%). The number of names wider than the index increased by 1 to 43 as the day's range fell to 4.25bps (one-week average 9.01bps), between low bid at 110.5 and high offer at 114.75 and higher beta credits (-4.45%) outperformed lower beta credits (-3.75%).
In IG, tighteners outpaced wideners by around 18.7-to-1, with 6 credits notably wider. By sector, CONS saw 5% names wider, ENRGs 0% names wider, FINLs 5% names wider, INDUs 11% names wider, and TMTs 0% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 94.5bps and the latter at 85.91bps.
Cross Market, we are seeing the HY-XOver spread compressing to 146.58bps from 176.05bps, and remains below the short-term average of 173.7bps, with the HY/XOver ratio falling to 1.3x, below its 5-day mean of 1.36x. The IG-Main spread compressed to 20bps from 23.07bps, but remains below the short-term average of 24.5bps, with the IG/Main ratio falling to 1.22x, below its 5-day mean of 1.27x.
In the US, non-financials outperformed financials as IG ExFINLs are tighter by 4bps to 85.9bps, with 92 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 4.66bps to 100.75bps, with Finance names (worst) tighter by 14.75bps to 654.03bps, Brokers (best) tighter by 7.67bps to 128.33bps, and Banks tighter by 5.29bps to 131.9bps. Monolines are trading tighter on average by -436.72bps (4.73%) to 4565.17bps.
In IG, FINLs underperformed non-FINLs (3.88% tighter to 4.44% tighter respectively), with the former (IG FINLs) tighter by 9.5bps to 234.1bps, with 20 of the 21 names tighter. The IG CDS market (as per CDX) is 8.2bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (103.75bps), with the bond ETFs outperforming the IG CDS market by around 0.64bps.
In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 0.33bps to 94.5bps (with ITRX FINLs -trending wider- better by 4.58 to 82bps) and is currently trading at the wides of the week's range at 94.98%, between 94.83 to 88.25bps, and is trending wider. Main LoVOL (trend wider) is currently trading at the wides of the week's range at 76.57%, between 71.51 to 65.29bps. ExHVOL outperformed LoVOL as the differential compressed to 2.38bps from 3.39bps, but remains below the short-term average of 7.33bps. The Main exFINLS to IG ExHVOL differential decompressed to 22.07bps from 19.93bps, but remains above the short-term average of 16.04bps.
The Emerging Market index is 2.2% less risky (6.1bps tighter) to 266.5bps. EM10 (No Trend) is currently trading tight to its week's range at 17.58%, between 275.9 to 264.5bps. The HY-EM spread compressed to 368.98bps from 400.54bps, and remains below the short-term average of 388.29bps, with the HY/EM ratio falling to 2.38x, below its 5-day mean of 2.44x.
Commentary compliments of www.creditresearch.com
CDR LQD 50 NAIG -4.33bps to 84.09 (2 wider - 47 tighter <> 28 steeper - 22 flatter).
CDX13 IG -4bps to 102.5 ($0.57 to $99.9) (FV -4.51bps to 98.92) (8 wider - 110 tighter <> 71 steeper - 53 flatter) - Trend Wider.
CDX13 HVOL -9.38bps to 207.5 (FV -9.63bps to 187.92) (1 wider - 27 tighter <> 19 steeper - 11 flatter) - Trend Wider.
CDX13 ExHVOL -2.3bps to 69.34 (FV -2.95bps to 71.75) (7 wider - 88 tighter <> 42 steeper - 52 flatter).
CDX13 HY (30% recovery) Px $+1.22 to $92.75 / -35.5bps to 695.4 (FV -33.15bps to 647.72) (3 wider - 94 tighter <> 81 steeper - 18 flatter) - Trend Tighter.
CDX12 IG -4.25bps to 112 ($0.18 to $99.51) (FV -5.09bps to 109.75) (6 wider - 113 tighter <> 75 steeper - 50 flatter) - Trend Wider.
CDX12 HVOL -9.9bps to 237.3 (FV -10.94bps to 230.31) (0 wider - 29 tighter <> 21 steeper - 9 flatter) - Trend Wider.
CDX12 ExHVOL -2.47bps to 72.43 (FV -3.34bps to 73.71) (6 wider - 89 tighter <> 41 steeper - 54 flatter).
CDX11 XO -11.2bps to 272.5 (FV -14.66bps to 301.42) (1 wider - 32 tighter <> 20 steeper - 14 flatter) - Trend Wider.
CDX12 HY (30% recovery) Px $+1.35 to $94.875 / -37.7bps to 635.5 (FV -32.86bps to 629.63) (3 wider - 87 tighter <> 76 steeper - 17 flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $+0.3 to $98.35 / -9.54bps to 550.41 - Trend Wider.
MCDX12 -7616bps to 84bps. - No Trend.
CDR Counterparty Risk Index fell 4.81bps (-4.57%) to 100.6bps (0 wider - 14 tighter).
CDR Government Risk Index fell 0.91bps (-2.05%) to 43.43bps..
DXY weakened 0.44% to 76.67.
Oil rose $0.43 to $70.38.
Gold rose $14.3 to $1017.1.
VIX fell 1.84pts to 26.84%.
10Y US Treasury yields fell 0.5bps to 3.22%.
S&P500 Futures gained 1.47% to 1036.7.