Daily Credit Summary: October 8: Divergence Remains
Spreads were mixed today with most major indices only marginally changed on the day as ExHVOL underperformed thanks to high-beta retailer outperformance dragging HVOL in. HY was unch (and has been for 3 days now) and while corporate curves continue to steepen (more in cash than CDS), we suspect this is shortening duration bets rather than full sentiment bets. Equity once again outperformed credit today.
We remain fascinated by the divergence that we have seen in equity and credit in the last few days and suggest that with the curve action (in cash and synthetic), TSY moves, and today's lack of follow through on good numbers, that credit may just have this one right again. The S&P is 25pts higher from the 10/5 close, IG is around 1bp wider in that same period, HY is unch (notable given the recent voracious appetite for risk), and against all of that vol is down 2.5pts (which might have helped explain the difference but in this case does not). It appears from the bottom-up that the aggregate relationships between CDS, equity, and vol are somewhat convergent currently (after compressing recently) but top-down there is some significant divergence to fill.
Off-the-runs were very quiet but we still like IG13 5Y vs IG9 7Y decompression and short ExHVOL.
IG trades 0.1bps wide (cheap) to its 50d moving average, which has held it now for 4 days (the most stability relative to the average we have seen since the March wides). At 112.56bps, IG has closed tighter on 23 days so far this year (200 trading days).
Indices typically underperformed single-names with skews widening in general as IG's skew widened as it underperformed, HVOL outperformed but narrowed the skew, ExHVOL intrinsics beat and narrowed the skew, XO's skew increased as the index outperformed, and HY's skew widened as it underperformed.
10.4% of names in IG moved more than their historical vol would imply as higher vol names underperformed lower vol names by -0.44% to -1.32%. 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 JC Penney Co. (-15bps) pushing IG 0.12bps tighter, and CIT Group Inc (+107.19bps) adding 0.46bps to IG. HVOL is more sensitive with JC Penney Co. pushing it 0.5bps tighter, and CIT Group Inc contributing 1.99bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Textron Financial Corp (-12.5bps) pushing the index 0.13bps tighter, and FirstEnergy Corp (+6.72bps) adding 0.07bps to ExHVOL.
The price of investment grade credit rose 0% to around 99.49% of par, while the price of high yield credits rose 0.06% to around 95% of par. ABX market prices are higher (improving) by 0.25% of par or in absolute terms, 0.66%. Broadly speaking, CMBX market prices are unch. Volatility (VIX) is down -0.5pts to 24.18%, with 10Y TSY selling off (yield rising) 6.3bps to 3.25% and the 2s10s curve steepened by 3.9bps, as the cost of protection on US Treasuries fell 1.25bps to 21.5bps. 2Y swap spreads tightened 0.2bps to 34.13bps, as the TED Spread tightened by 0bps to 0.23% and Libor-OIS improved 0.1bps to 13bps.
The Dollar weakened with DXY falling 0.75% to 75.923, Oil rising $1.86 to $71.43 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 1.61% today (a 1.92% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $10.9 to $1055.1 as the S&P rallies (1065 1.08%) outperforming IG credits (112.5bps 0%) while IG, which opened tighter at 109.25bps, underperforms HY credits. IG11 and XOver11 are -1.9bps and -6.5bps respectively while ITRX11 is -3.12bps to 91.13bps.
The majority of credit curves flattened 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 +8.5bps 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.
Only 25% of IG credits are shifting by more than 3bps and 45% of the CDX universe are also shifting significantly (less than the 5 day average of 49%). The number of names wider than the index stayed at 40 as the day's range rose to 5bps (one-week average 6.34bps), between low bid at 108.75 and high offer at 113.75 and higher beta credits (-1.57%) outperformed lower beta credits (-0.18%).
In IG, tighteners outpaced wideners by around 1.8-to-1, with 37 credits notably wider. By sector, CONS saw 16% names wider, ENRGs 19% names wider, FINLs 29% names wider, INDUs 29% names wider, and TMTs 61% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 94.89bps and the latter at 84.17bps.
Cross Market, we are seeing the HY-XOver spread decompressing to 161.44bps from 158.57bps, but remains below the short-term average of 167.62bps, with the HY/XOver ratio rising to 1.34x, below its 5-day mean of 1.35x. The IG-Main spread decompressed to 20.39bps from 19.17bps, but remains below the short-term average of 21.82bps, with the IG/Main ratio rising to 1.22x, below its 5-day mean of 1.24x.
In the US, non-financials outperformed financials as IG ExFINLs are tighter by 1.1bps to 84.2bps, with 56 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 0.96bps to 101.14bps, with Finance names (worst) wider by 18.35bps to 685.46bps, Brokers (best) tighter by 0.08bps to 134.08bps, and Banks wider by 0.14bps to 137.12bps. Monolines are trading wider on average by 37.44bps (0.44%) to 5168.66bps.
In IG, FINLs underperformed non-FINLs (0.97% wider to 1.32% tighter respectively), with the former (IG FINLs) wider by 2.3bps to 242.8bps, with 12 of the 21 names tighter. The IG CDS market (as per CDX) is 9.4bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (103.07bps), with the bond ETFs outperforming the IG CDS market by around 1.77bps.
In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 0.97bps to 94.89bps (with ITRX FINLs -trading sideways- better by 2.5 to 81bps) and is currently trading in the middle of the week's range at 58.33%, between 96.44 to 92.72bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading at the wides of the week's range at 78.39%, between 72.01 to 69.76bps. ExHVOL underperformed LoVOL as the differential decompressed to -0.36bps from -1.9bps, but remains below the short-term average of 3.04bps. The Main exFINLS to IG ExHVOL differential compressed to 23.73bps from 25.75bps, but remains above the short-term average of 20.82bps.
Commentary compliments of www.creditresearch.com
CDR LQD 50 NAIG -1.08bps to 84.34 (11 wider - 31 tighter 24 steeper - 26 flatter).
CDX13 IG +1bps to 103 ($0.39 to $99.88) (FV -0.86bps to 98.72) (40 wider - 70 tighter 51 steeper - 74 flatter) - No Trend.
CDX13 HVOL -4.17bps to 197.5 (FV -2.09bps to 186.16) (8 wider - 21 tighter 14 steeper - 16 flatter) - Trend Tighter.
CDX13 ExHVOL +2.63bps to 73.16 (FV -0.49bps to 72.01) (32 wider - 63 tighter 58 steeper - 37 flatter).
CDX13 HY (30% recovery) Px $0 to $92.88 / 0bps to 691.7 (FV -18.11bps to 621.66) (8 wider - 91 tighter 78 steeper - 22 flatter) - Trend Tighter.
CDX12 IG -0.06bps to 112.5 ($0 to $99.49) (FV -0.73bps to 109.71) (38 wider - 72 tighter 48 steeper - 77 flatter) - No Trend.
CDX12 HVOL -3.5bps to 243.5 (FV -0.83bps to 231.35) (8 wider - 21 tighter 12 steeper - 18 flatter) - No Trend.
CDX12 ExHVOL +1.03bps to 71.13 (FV -0.7bps to 73.37) (30 wider - 65 tighter 59 steeper - 36 flatter).
CDX12 HY (30% recovery) Px $+0.06 to $95 / -1.6bps to 632 (FV -18.11bps to 605.14) (7 wider - 86 tighter 73 steeper - 21 flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $+0.1 to $98.35 / -3.24bps to 550.41 - Trend Tighter.
MCDX12 +2.9bps to 87.4bps. - Trend Tighter.
CDR Counterparty Risk Index fell 1.16bps (-1.13%) to 100.94bps (3 wider - 11 tighter).
CDR Government Risk Index fell 1.2bps (-2.76%) to 42.36bps..
DXY weakened 0.77% to 75.9.
Oil rose $1.87 to $71.44.
Gold rose $10.9 to $1055.1.
VIX fell 0.5pts to 24.18%.
10Y US Treasury yields rose 6.5bps to 3.25%.
S&P500 Futures gained 1.01% to 1064.2.