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Daily Credit Summary: September 1 - Good News Is No News
Spreads were broadly wider in the US as all the indices deteriorated (and while HY underperformed, it did not as much as one might have expected with equity underperforming credit as we had warned with ExHVOL (low beta) underperforming). Indices typically underperformed single-names (as IG reached back to 8/20 wides and HY back to 8/17 price lows) with skews widening in general as IG underperformed but narrowed the skew, HVOL outperformed but widened 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.
The names having the largest impact on IG are International Lease Finance Corp. (-15.16bps) pushing IG 0.1bps tighter, and American International Group, Inc. (+50.35bps) adding 0.31bps to IG (as the divergence we noted yesterday began to unwind). HVOL is more sensitive with International Lease Finance Corp. pushing it 0.43bps tighter, and American International Group, Inc. contributing 1.36bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Transocean Ltd. (-5.5bps) pushing the index 0.06bps tighter, and Staples Inc. (+7.75bps) adding 0.08bps to ExHVOL.
The price of investment grade credit fell 0.16% to around 99.05% of par, while the price of high yield credits fell 0.44% to around 87.56% of par. ABX market prices are lower by 0.08% of par or in absolute terms, 0.08%. Broadly speaking, CMBX market prices are lower by 0.59% of par or in absolute terms, 0.18%. Volatility (VIX) is up 3.14pts to 29.15% (highest since 7/13 as implied equity correlation also rose to the upper end of its trading channel), with 10Y TSY rallying (yield falling) 2.9bps to 3.37% and the 2s10s curve steepened by 3.4bps, as the cost of protection on US Treasuries rose 2.25bps to 25.25bps. 2Y swap spreads widened 1.1bps to 37.19bps, as the TED Spread tightened by 0.3bps to 0.21% and Libor-OIS improved 1.3bps to 15.5bps.
The Dollar strengthened with DXY rising 0.74% to 78.753, Oil falling $1.7 to $68.26 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 2.98% today (a 1.69% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $5.4 to $956.65 as the S&P is down (996.2 -2.3%) underperforming IG credits (123bps -0.16%) while IG, which opened wider at 121.5bps, outperforms HY credits. IG11 and XOver11 are +1.5bps and +16.55bps respectively while ITRX11 is +4.35bps to 95.75bps.
Dispersion rose +1.2bps 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.
40% of IG credits are shifting by more than 3bps and 51% of the CDX universe are also shifting significantly (more than the 5 day average of 41%). The number of names wider than the index decreased by 1 to 43 as the day's range rose to 6bps (one-week average 4.3bps), between low bid at 117 and high offer at 123 and higher beta credits (2%) outperformed lower beta credits (2.46%).
In IG, wideners outpaced tighteners by around 6-to-1, with 90 credits wider. By sector, CONS saw 92% names wider, ENRGs 56% names wider, FINLs 52% names wider, INDUs 64% names wider, and TMTs 78% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 96.86bps and the latter at 101.08bps.
Cross Market, we are seeing the HY-XOver spread compressing to 235.74bps from 238.27bps, but remains above the short-term average of 225.25bps, with the HY/XOver ratio falling to 1.38x, above its 5-day mean of 1.38x. The IG-Main spread compressed to 27.25bps from 27.6bps, but remains above the short-term average of 24.96bps, with the IG/Main ratio falling to 1.28x, above its 5-day mean of 1.27x.
In the US, non-financials underperformed financials as IG ExFINLs are wider by 2.5bps to 101.1bps, with 15 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 1.44bps to 121.5bps, with Finance names (worst) wider by 7.44bps to 914.28bps, Banks (best) wider by 0.93bps to 159.54bps, and Brokers wider by 1.5bps to 153.58bps. Monolines are trading tighter on average by -11.25bps (0.93%) to 4063.06bps.
In IG, FINLs outperformed non-FINLs (1.27% wider to 2.49% wider respectively), with the former (IG FINLs) wider by 3.7bps to 294.5bps, with 1 of the 21 names tighter.The IG CDS market (as per CDX) is 27.6bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (95.4bps), with the bond ETFs underperforming the IG CDS market by around 2.31bps.
In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 4.11bps to 96.86bps (with ITRX FINLs -trading sideways- weaker by 5.31 to 91.31bps) and is currently trading at the wides of the week's range at 100%, between 96.86 to 91.2bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading at the wides of the week's range at 100.09%, between 67.8 to 64.74bps. ExHVOL underperformed LoVOL as the differential decompressed to 7.2bps from 4.83bps, but remains above the short-term average of 4.13bps. The Main exFINLS to IG ExHVOL differential compressed to 21.86bps from 23.01bps, but remains below the short-term average of 23.46bps.
The Emerging Market index is 1.8% riskier (5.6bps wider) to 323.3bps. EM10 (Trend Wider) is currently trading at the wides of the week's range at 100.33%, between 323.3 to 310bps. The HY-EM spread decompressed to 530.15bps from 521.76bps, but remains above the short-term average of 509.47bps, with the HY/EM ratio falling to 2.64x, above its 5-day mean of 2.62x.
Commentary compliments of www.creditresearch.com
Index/Intrinsics Changes
CDR LQD 50 NAIG +2.57bps to 104.15 (41 wider - 3 tighter <> 22 steeper - 27 flatter).
CDX12 IG +4bps to 123 ($-0.16 to $99.05) (FV +2.96bps to 132.36) (96 wider - 11 tighter <> 53 steeper - 70 flatter) - Trend Wider.
CDX12 HVOL 0bps to 275 (FV +6.77bps to 331.06) (24 wider - 2 tighter <> 8 steeper - 22 flatter) - Trend Wider.
CDX12 ExHVOL +5.26bps to 75 (FV +1.84bps to 76.32) (72 wider - 23 tighter <> 50 steeper - 45 flatter).
CDX11 XO +5.9bps to 320.2 (FV +8.12bps to 366.02) (27 wider - 4 tighter <> 9 steeper - 24 flatter) - Trend Wider.
CDX12 HY (30% recovery) Px $-0.44 to $87.56 / +14bps to 853.5 (FV +13.85bps to 766.48) (79 wider - 12 tighter <> 20 steeper - 73 flatter) - Trend Wider.
LCDX12 (65% recovery) Px $-0.25 to $92.75 / +10.01bps to 750.11 - Trend Wider.
MCDX12 0bps to 125bps. - No Trend.
CDR Counterparty Risk Index rose 1.65bps (1.38%) to 121.72bps (13 wider - 1 tighter).
CDR Government Risk Index rose 1.83bps (4.25%) to 44.79bps..
DXY strengthened 0.74% to 78.75.
Oil fell $1.7 to $68.26.
Gold rose $5.4 to $956.65.
VIX increased 3.14pts to 29.15%.
10Y US Treasury yields fell 3.5bps to 3.37%.
S&P500 Futures lost 2.3% to 996.2.
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Most of this report is computer generated!!
SkyNet is everywhere.
TD, surprised you didn't comment/post on this.
http://www.bloomberg.com/apps/news?pid=20602007&sid=a0Wv8V6kZtmE
How can this be considered anything but monetization of agency debt?
this is off topic, but i have read peoples comments on how 401k's are a scam. can somone explain the reasoning? thx
Perhaps not the scam portion of the answer, but much too high a percentage of people just throw their money into mutual funds, handled by "managers" , and have no idea of what companies they are investing in nor why.
Huge sums of money given to unknown, unseen "managers" is a scenario ripe for plunder.
Exactly. the choices in a 401k are usually awful, consisting mostly of large cap US equity funds. So you are paying people to underperform the S&P. These are the same people who do nothing about HFT, and did nothing about the late trading scandals a few years ago. Large cap US equity fund managers are chumps who are born to be ripped off, and you are giving your money to them.
If your 401k provider does not provide a self-directed option, ask them for one, and if they don't comply, threaten them with legal action under ERISA. These days it isn't hard to use Fidelity as a 401k provided and get set up with a self-directed brokerage account (as one example). Your investment options will be limited mostly to long-only equities or cash, but of course that includes all kinds of ETFs.
If I work for a federal agency, can I still ask for a self-directed retirement option? We just have your run of the mill funds and it's limiting, to say the least.
Not sure, but I can't see why not. I think it depends on the 401k provider, not the sponsor organization. The two times I have had self-directed 401ks, both companies used Fidelity. It was really easy to set up the self-directed option, and once you have it, it is basically like any other online trading account, except you can't sell options and fun stuff like that. But you can buy AIG to your heart's content if you want.
I would guess other 401k providers have self-directed options, but I am not sure, not being an expert in these things.
The other thing you might want to look into is rolling over money periodically into a rollover IRA, again, I am no expert, but I am pretty sure you can roll over money tax free even from your current employer (obviously, only the vested portion of your 401k). once it is rolled over into, say, Schwab, again you are home free to invest as permitted).
If you work for a federal agency, then no, but on the bright side you get the TSP, where all of your investment options have fewer than 10 basis points of expense.
You also can get about a 300 basis point subsidy right now by putting all of your TSP in the G fund. Everyone else who reads this board can get a risk free rate of like 0.15%, but with the G fund you get what is for practical purposes the yield of a 10-year treasury but with no interest rate risk. So, if bond yields go way up, you don't lose money, you just get paid more interest.
The G fund rocks.
Financial literacy is not a priority in the US. People unfortunately have no understanding of risk and it's made no more clear by the cable news equity cheerleaders. What's more diabolical is that people widely believe that stashing cash in MM accounts and US denominated bond funds carry less risk still. It seems they truly believe that diversification means buying small, med and large cap.
Sure. Think of this way. . . idiots like Walter Updegrave at CNN drone on and on about what a great deal 401k's are but the reality is you are getting screwed. Why?
Okay so you are putting pretax money into a 401k. Because of this, supposedly, the government restricts when you can take it out. Supposedly stock price appreciation, bond coupon payments, etc is supposed to "compound" astronomically thus it is worth this "pain" of not being able to touch the money that is rightfully YOURS.
Forgive the swearing , I got into the Stoli...
1) You can't readily get to the money that's in a 401k. That's right -- because your wonderful government granted you the priviledge of a pre-tax contribution, they claim authority to restrict what you can do with it. So does the company you invest with -- they usually add other bogus restrictions on your money. So let's suppose you want to start a business, pay off a gilted lover, flee the country, whatever. You can't do it with your 401k money without paying massive penalties. Officially, you can only take loans against your 401k (do you really want to go further into debt?), and there are only specific ways you can do it (has to be for medical expenses, to purchase a home, stuff like that). If you want to cash out your 401k, you have to pay fees to the firm, you also have to pay taxes to the government. This can amount to 30-40% of the total value! What a racket!
2) Most 401k plans offer totally shitty investment options.. From el crapo "diversified" growth plans, to "mixed-cap value plus" , to "international growth turd" , all sorts of of fake-ass names are invented to bilk you out of your money. Basically, all you can do with a 401k plan is say how much you want in stocks and how much in bonds. Supposedly according to know nothing-idiots this protects you from black swans. I assure you it does not. Due to the fact that the system is becoming unglued, zerohedge the dog want sabsolutely ZERO in stocks. But he can't do that, because if he does, he has to invest it in corporate bonds. Which are pretty much only slightly less shitty since the default rate is skyrocketing. The best zerohedge the dog were to put his money , if he had a 401k , would be in cash. Second best would be short-term US Treasuries. Or gold. But alas , most plans don't offer these options, so basically you pick bonds or stocks and watch your hard-earned money dwindle slowly to nothing , as the 401k money managers make six or seven digits per year for sitting on their fat asses, clicking their computer mouses, and losing your nest egg.
Oh also -- if you put in a liquidation notice for your 401k -- it can take MONTHS before it's processed. I know because I did this for one of my family members. I suspect many of these 401k funds are actually ponzi schemes ala Madoff, and that will not become clear until the whole system comes crashing down.
On to the last reason not to use a 401k...
3) There is currency risk. Given that most 401k assets are in USD stocks, or USD corporate bonds, some USD GSE paper, and USD Tbonds, you are highly exposed to USD currency risk. There is really no way to hedge it, since as mentioned earlier, most 401k plans totally suck. Thus, if ANYTHING happens to the US Dollar, your savings will be wiped out -- even if you picked a conservative option like putting all your 401k in cash or short-term US Tbonds.
So there you have it. This is why I never invested in a 401k. The world is awash in systemic risk. I don't know what will happen in another 12 months -- let alone when I retire. Hell there could be new wars and global meltdown within 24-36 months.
This is why I parked my money in cash and precious metals. I'm glad I did, because I still have my money, and my purchasing power has actually grown a bit. (I was buying gold coins down at $650). Anyway this whole financial collapse doesn't concern me all that much. I sleep allright at night. The cash hedges the precious metals, and the precious metals hedge the cash.
thanks PM. your opinion is always appreciated. i have always wanted a precious metals fund in my 401k but it is all about "buy and hold" with the funds that are offered to me. My co. matches 10% and 100% vested. would that make a difference in your opinion. Just curious.
I consider the 401k 'match' to be an offset a 50% currency decline, or an offset to 50% stock decline, etc. I just consider it to be a "risk-offset" rather than "free money".
Okay first off this ain't investment advices, it's just what i would do and what I consider most conservative and fiscally prudent....
Personally, I would just save the money. If you feel like you are getting a good deal, or you are already mentally comitted to your 401k, the best 401k option is to rotate into cash. If you can't put your 401k into cash, the next best options is probably bonds, particularly government bonds (short term Treasury paper). 'Precious metals fund' is no good because there is still counterparty risk.
To hedge the risk that comes from your 401k, you can purchase gold. Buy some 1oz gold coins -- eagles and maples are both good. You can use http://apmex.com. I think 20% of ppl's assets should be in gold, and at least another 20-50% should be in cash. So if you decide to keep your 401k -- make sure you have other assets in gold (gold coins), and also make sure you have cash (CDs, savings account, physical cash, whatever). For cash, it's probably best to keep it at a Credit Union or a solid bank. But that's just what I would do.
Anyway here's a link to the two gold coins I like , if you have never bought gold before:
https://www.apmex.com/Category/290/Gold_Eagles___1_oz_2009__Prior.aspx
https://www.apmex.com/Category/21/Gold_Canadian_Maple_Leafs_2009__Prior.aspx
I think people are insane if they do not have 20% of assets in gold but that's just me. Don't bother with the gold ETF this is a waste of your money. Buy physical gold or don't bother. So to get back to basics , and remember to have significant positions in both gold and cash.
thanks for the info. i have contemplated buying physical gold for the past year or so, but have no safe place to store it. i have been getting more into cash over the past few months and just trying to have as much physical money on hand as possible
Gold is extraordinarily easy to hide, because it concentrates so much wealth into so little space. Use your imagination -- this is what people have been doing for thousands of years.
thanks for the answers. Ghostface: if the fund i am currently in has outperformed the s&p for the last 40 years (rolling 10 year periods), and yes it is a large cap US equity fund, would you still invest in it? just curious. you are correct though about the lack of options available. they are extremely minimal. i think my company would fire me if i asked for a self directed 401k. i live in a right to work state and they boot people for no reasons.
personally I don't trust any large cap equity managers, but that is just me - I don't like paying people to manage my own money. (especially after I paid so much for the same or better education than most money managers)
again, I am no expert, but see my post above - some employers may allow in-service rollovers, where you can roll over 401k cash to an IRA. at least worth checking out.
Desparate people in desparate times do desparate things. It doesn't guarantee success as desparate folks don't think ahead.
Heavy, dude.
double post - removed
"CDR Government Risk Index rose 1.83bps (4.25%) to 44.79bps.."
Is there an ETF tracker so I can ride this rocket?
None that I'm aware off. I don't think this would be a retail product. The spread reports are excellent no matter how they're generated.
You've never been to France. The Government lives in fear of the 90%. When Middle France rolls into Paris, security forces clear a path for them.
good articles; good articles 4 slow news day ..http://www..
hat tip: finance news & finance opinions
(They know they're part of the 90%)