Daily Credit Summary: October 7 - Nifty Thrifty
Spreads were wider in the major indices today as single-names actually led the way weaker today and high beta underperformed low beta with wideners outpacing tighteners by almost 8-to-1. Credit continues to underperform stocks and a lifting in compression trades today and strength in TSYs suggests far less confidence in the recovery in fixed income investors than equity investors.
Credit opened wider and drifted very gently tighter all day as equity hugged the flatline (VWAP) for most of the day, but a late day (low volume) rally in SPY kicking AA higher into the close saw IG12 and 13 both gap tighter and close at their tights. We did NOT see the same in HY12 or 13 and (as we discuss below) we suspect this was decompression trades coming in.
Another low range day in IG and HY market today but both made wider tights and wider wides compared to yesterday as HVOL12 significantly underperformed HVOL13 (far more than intrinsics even with CIT 100+bps widening).
INDUstrials underperformed and CONSumers outperformed (although all sectors were wider with at least 70% of single-names wider). ENRG and TMT were middle of the road today as financials underperformed non-financials (with high beta and low beta financials all weak today).
It is clear to us that heading into earnings season that credit markets are much more nervous than stocks and vol. Maybe this makes some sense given the relative outperformance of credit recently (especially HY) but it is important to note the relative size of flow into bonds vs stocks and how much weighting should be given to the bond market (think TSY and corporate) opinion. This weakness is best played (in our opinion) in the short ExHVOL or more convoluted HY-IG over XOver-Main trade. IG12 remains just above its 50d moving average but modestly cheap to intrinsics as HY12 skews compress considerably.
It appeared the signals of the day were of consumer thrift with COST and FDO beating expectations (as we would expect in a reach-for-discount type environment) and later further evidence from the Consumer Credit contraction. Despite all that the 10Y auction was very heavily subscribed and the morning's small but well-received (see spike in stocks) POMO seems to suggest that the government remains unperturbed at dollar weakness and lack of spending, as they will cover it for us - Keynes paradoxes back at play again.
Consumer Credit dropped a worse than expected $12bn, pushing total credit back to Jul07 levels as revolving credit fell much more than non-revolving credit (perhaps ominously signaling less credit card purchases and a CfC hangover). AXP and (more so) COF widened notably after the number came out as financials in general were weak today and we note once again that GS was underperforming.
PIMCO deciding to desert the sinking CIT ship is very interesting to us and it appears from the jump in CDS today that some of the remaining committee decided to buy some protection. 3s, 5s,and 7s were active and wider today with less activity at the short-end as the curve inverted more and 5Y broke above 40%upf. We note, somewhat amazedly (if there is such a word) that this is the widest since only 09/10 and solid trading for a few months before that in the mid to high 40s and a peak in July just over 50% upf.
Somewhat oddly, the IG9x13 roll was compressing intraday although close-to-close it decompressed which makes more sense to us as the CIT inversion impact should over-rule some of the recovery steepening/roll beta compression we have seen. Same kind of action in IG12x13 was evident as IG13 underperformed IG12 (despite its CIT exposure). This oopsydaisy makes us think we were seeing 'new' flow coming into the on-the-run from the short side (which corresponds with the underperformance trend in credit relative to equity recently).
The notable drop in HY12 and 13 (first time in 5 days) seems to indicate that we are seeing a chink in the 'risk on' armor going into earnings and maybe the HY13-IG12 decompression trade is the preferred vehicle of choice here (avoiding CIT specific exposure as both have it and playing more systemically as well as cheaper upfront in HY13). This might help to explain IG12's relative outperformance today also. NOTE - late in the day we saw IG13 gap a little tighter and end up outperforming IG12 as we suspect the HY-IG decompression trades took hold (or more simply compression trades were lifted).
Overnight we saw concerns from the Fed that banks are slow to recognize CRE losses (no big surprise to us there eh?), the Corus assets getting bid at 60c on the dollar (and the winning bid 20c higher than others), and today we note CMBX prices fell across the board with more recent vintages actually suffering worse today. ABX prices rose a smidge on the day as builders weakened (with PHM relative underperformer) as tax credit extension concerns reappeared (BZH and HOV both popped handily back above 1000bps). The higher quality REITs hung in there today as CMBX weakened which might be more of the same implied loss bet that we have seen discussed around the market (although SPG and BXP did weaken a smidge).
Sovereigns were wider today with unsurprisingly EM names underperforming.China outperformed most of the major EU names and USA as VIX dropped once again (and implied correlation also fell) as it seems implicit equity-based positive bets are outweighing credit-based bearish bets currently.
Movers in Detail
Spreads generally widened in the major indies today (with ExHVOL outperforming thanks to major HVOL weakness) as s13 indices outperformed s12 indies but 9x13 saw decompression (which makes sense as CIT's curve inversion trumped refi/recovery steepening in the short-end). IG trades 0.5bps wide (cheap) to its 50d moving average, which is a Z-Score of 0.1s.d. At 112.88bps, IG has closed tighter on 23 days so far this year (200 trading days). The last five days have seen IG converging to its 50d moving average.
Indices generally outperformed intrinsics with skews widening in general as IG outperformed but narrowed the skew, HVOL underperformed but widened the skew, ExHVOL outperformed pushing the skew wider, XO underperformed but widened the skew, and HY outperformed but narrowed the skew.
20% of names in IG moved more than their historical vol would imply as higher vol names underperformed lower vol names by 3.24% to 1.82%. 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 National Rural Utilities Cooperative Finance Corporation (-5.28bps) pushing IG 0.04bps tighter, and CIT Group Inc (+111.48bps) adding 0.49bps to IG. HVOL is more sensitive with Simon Property Group, L.P. pushing it 0.07bps tighter, and CIT Group Inc contributing 2.11bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both National Rural Utilities Cooperative Finance Corporation (-5.28bps) pushing the index 0.05bps tighter, and Hartford Financial Services Group (+22.5bps) adding 0.24bps to ExHVOL.
The price of investment grade credit fell 0.03% to around 99.48% of par, while the price of high yield credits fell 0.37% to around 94.63% of par. ABX market prices are higher (improving) by 0.11% of par or in absolute terms, 0.45%. Broadly speaking, CMBX market prices are lower by 0.53% of par or in absolute terms, 0.13%. Volatility (VIX) is down -1.02pts to 24.62%, with 10Y TSY rallying (yield falling) 8.1bps to 3.18% and the 2s10s curve flattened by 3.3bps, as the cost of protection on US Treasuries rose 1bps to 22.5bps. 2Y swap spreads widened 0.4bps to 34.25bps, as the TED Spread widened by 1.8bps to 0.23% and Libor-OIS deteriorated 0.2bps to 13bps.
The Dollar strengthened with DXY rising 0.14% to 76.444, Oil falling $1.12 to $69.76 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 1.72% today (a 1.44% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $1.5 to $1043.6 as the S&P rallies (1053.8 0.5%) outperforming IG credits (112.75bps -0.03%) while IG, which opened wider at 113bps, outperforms HY credits. IG11 and XOver11 are +3bps and +6.52bps respectively while ITRX11 is +5bps to 94.25bps.
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).
Dispersion rose +9.7bps 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 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 51% of the CDX universe are also shifting significantly (less than the 5 day average of 56%). The number of names wider than the index stayed at 40 as the day's range fell to 4.12bps (one-week average 7.88bps), between low bid at 112.38 and high offer at 116.5 and higher beta credits (3.02%) underperformed lower beta credits (2.89%).
In IG, wideners outpaced tighteners by around 5.3-to-1, with 95 credits notably wider. By sector, CONS saw 68% names wider, ENRGs 75% names wider, FINLs 86% names wider, INDUs 86% names wider, and TMTs 70% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 95.86bps and the latter at 85.82bps.
Cross Market, we are seeing the HY-XOver spread decompressing to 167.16bps from 156.16bps, but remains below the short-term average of 173.15bps, with the HY/XOver ratio rising to 1.35x, below its 5-day mean of 1.36x. The IG-Main spread decompressed to 19.36bps from 19.13bps, but remains below the short-term average of 22.74bps, with the IG/Main ratio rising to 1.21x, below its 5-day mean of 1.25x.
In the US, non-financials outperformed financials as IG ExFINLs are wider by 2bps to 85.8bps, with 16 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 4.01bps to 102.18bps, with Brokers (worst) wider by 8.17bps to 134.92bps, Finance names (best) wider by 26.58bps to 664.93bps, and Banks wider by 5.21bps to 137.12bps. Monolines are trading wider on average by 5.21bps (0.37%) to 4813.99bps. In IG, FINLs underperformed non-FINLs (4.03% wider to 2.4% wider respectively), with the former (IG FINLs) wider by 9.4bps to 241.8bps, with 2 of the 21 names tighter. The IG CDS market (as per CDX) is 7.8bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (104.91bps), with the bond ETFs underperforming the IG CDS market by around 2.64bps.
In Europe, ITRX Main ex-FINLs (outperforming FINLs) rallied 0.58bps to 95.86bps (with ITRX FINLs -trading sideways- weaker by 4.9 to 83.5bps) and is currently trading at the wides of the week's range at 92.92%, between 96.44 to 88.25bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading at the wides of the week's range at 100.02%, between 71.88 to 65.29bps. ExHVOL outperformed LoVOL as the differential compressed to -1.12bps from 3.98bps, but remains below the short-term average of 4.66bps. The Main exFINLS to IG ExHVOL differential decompressed to 25.09bps from 21.26bps, but remains above the short-term average of 19.16bps.
The Emerging Market index is 0.4% riskier (1bps wider) to 254.4bps. EM10 (Trend Tighter) is currently trading tight to its week's range at 4.79%, between 276.1 to 253.3bps. The HY-EM spread decompressed to 387.76bps from 378.51bps, but remains below the short-term average of 392.25bps, with the HY/EM ratio rising to 2.52x, above its 5-day mean of 2.49x.
Commentary compliments of www.creditresearch.com
CDR LQD 50 NAIG +2.49bps to 85.57 (39 wider - 7 tighter <> 31 steeper - 17 flatter).
CDX13 IG +0.25bps to 102.75 ($0.38 to $99.89) (FV +2.7bps to 100.08) (95 wider - 19 tighter <> 69 steeper - 55 flatter) - Trend Tighter.
CDX13 HVOL 0bps to 200 (FV +5.5bps to 189.69) (27 wider - 2 tighter <> 17 steeper - 13 flatter) - Trend Tighter.
CDX13 ExHVOL +0.33bps to 72.04 (FV +1.84bps to 72.73) (68 wider - 27 tighter <> 43 steeper - 52 flatter).
CDX13 HY (30% recovery) Px $+0.12 to $93 / -3.4bps to 688 (FV +11.67bps to 639.67) (88 wider - 8 tighter <> 28 steeper - 72 flatter) - Trend Tighter.
CDX12 IG +0.75bps to 112.75 ($-0.03 to $99.48) (FV +3.33bps to 111.21) (96 wider - 19 tighter <> 71 steeper - 53 flatter) - Trend Tighter.
CDX12 HVOL +17.1bps to 245.7 (FV +7.85bps to 234.07) (28 wider - 2 tighter <> 18 steeper - 12 flatter) - Trend Tighter.
CDX12 ExHVOL -4.41bps to 70.77 (FV +1.99bps to 74.52) (68 wider - 27 tighter <> 42 steeper - 53 flatter).
CDX11 XO +302.4bps to 565 (FV +5.05bps to 298.22) (26 wider - 5 tighter <> 11 steeper - 22 flatter) - Trend Wider.
CDX12 HY (30% recovery) Px $-0.37 to $94.63 / +10.3bps to 642.2 (FV +11.8bps to 622.96) (83 wider - 6 tighter <> 25 steeper - 69 flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $-0.23 to $98.1 / +7.25bps to 558.33 - Trend Tighter.
MCDX12 +0.67bps to 84.5bps. - Trend Tighter.
CDR Counterparty Risk Index rose 3.91bps (3.98%) to 102.08bps (14 wider - 0 tighter).
CDR Government Risk Index rose 0.96bps (2.27%) to 43.52bps..
DXY strengthened 0.14% to 76.44.
Oil fell $1.12 to $69.76.
Gold rose $1.5 to $1043.6.
VIX fell 1.02pts to 24.62%.
10Y US Treasury yields fell 7.9bps to 3.18%.
S&P500 Futures gained 0.5% to 1053.8.