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Daily Credit Summary: September 10 - Yackety Sax

Submitted by Tyler Durden on 09/10/2009 17:33 -0400

Spreads were tighter in the US as all the indices improved (with IG and HY at their tightest closes since 08/10 and rallying for the fifth day-in-a-row for the first time since the Dec08 roll). IG trades 10.4bps tight (rich) to its 50d moving average, which is a Z-Score of -1s.d.. At 111bps, IG has closed tighter on only 4 days so far this year (181 trading days). The last five days have seen IG diverging (bullishly) from its 50d moving average. Indices typically underperformed single-names with skews narrower with HVOL the most notable and talk of some index arb and tail hedge unwinds was heard.

We are starting to wonder whether the labor-day holiday combined with its proximity to the roll is driving shorts to cover early in a game-theoretic short's dilemma - certainly felt that way in equities on the other side of the equation today.

The names having the largest impact on IG are American International Group, Inc. (-101.66bps) pushing IG 0.63bps tighter, and Barrick Gold Corp. (+4.5bps) adding 0.04bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 2.77bps tighter (and along with ILFC almost 6bps), and Vornado Realty LP contributing 0bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Staples Inc. (-10bps) pushing the index 0.1bps tighter, and Barrick Gold Corp. (+4.5bps) adding 0.05bps to ExHVOL. (We note that the decompression in low spread names somewhat triggered by KFT's deal news, may be somewhat responsible for the compression at the high spread end of the index as super senior risk rises and hedges need to be adjusted across the capital structure - especially in a low liquidity environment).

The price of investment grade credit rose 0.12% to around 99.57% of par, while the price of high yield credits rose 1.25% to around 91% of par. ABX market prices are higher (improving) by 0.03% of par or in absolute terms, 0.2%. Broadly speaking, CMBX market prices are lower by 0.02% of par or in absolute terms, 0.01%. Volatility (VIX) is down 0.77pts to 23.55%, with 10Y TSY rallying (yield falling) 11.7bps to 3.36% and the 2s10s curve flattened by 8.5bps, as the cost of protection on US Treasuries fell 0.87bps to 22.5bps. 2Y swap spreads tightened 1.3bps to 32bps, as the TED Spread tightened by 0.2bps to 0.16% and Libor-OIS improved 1.3bps to 11.9bps.

The Dollar weakened with DXY falling 0.38% to 76.799, Oil rising $0.86 to $72.17 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 0.79% today (a 0.83% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $4.05 to $996.35 as the S&P rallies (1042 0.92%) outperforming IG credits (110.5bps 0.12%) while IG, which opened tighter at 113bps, underperforms HY credits. IG11 and XOver11 are -2.26bps and -4bps respectively while ITRX11 is -1bps to 87bps.

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), and additionally the ratio has dropped below 0.9x which is exceptionally bearish for stocks and spreads.

Dispersion fell -9.3bps 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 56% of the CDX universe are also shifting significantly (more than the 5 day average of 45%). The number of names wider than the index stayed at 45 as the day's range rose to 5bps (one-week average 4.5bps), between low bid at 109.5 and high offer at 114.5 and higher beta credits (-3.78%) outperformed lower beta credits (-1.7%).

In IG, wideners were outpaced by tighteners by around 7-to-1, with only 16 credits notably wider. By sector, CONS saw 19% names wider, ENRGs 0% names wider, FINLs 5% names wider, INDUs 18% names wider, and TMTs 13% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 88bps and the latter at 94.12bps.

Cross Market, we are seeing the HY-XOver spread compressing to 169.47bps from 203.23bps, but remains below the short-term average of 217.91bps, with the HY/XOver ratio falling to 1.29x, below its 5-day mean of 1.36x. The IG-Main spread compressed to 23.5bps from 25.25bps, and remains below the short-term average of 24.95bps, with the IG/Main ratio falling to 1.27x, above its 5-day mean of 1.27x.

In the US, non-financials underperformed financials as IG ExFINLs are tighter by 3.2bps to 94.1bps, with 75 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 2.75bps to 112.26bps, with Brokers (worst) tighter by 1.67bps to 150.83bps, Banks (best) tighter by 5.11bps to 143.37bps, and Finance names tighter by 19.56bps to 847.33bps. Monolines are trading tighter on average by -3.09bps (0.2%) to 4905.58bps.

In IG, FINLs outperformed non-FINLs (4.55% tighter to 3.27% tighter respectively), with the former (IG FINLs) tighter by 12.8bps to 268bps, with 15 of the 21 names tighter. The IG CDS market (as per CDX) is 20.7bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (89.81bps), with the bond ETFs underperforming the IG CDS market by around 6.33bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 0.81bps to 88bps (with ITRX FINLs -trending tighter- better by 1.75 to 83bps) and is currently trading tight to its week's range at 0%, between 99.35 to 88bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at -0.05%, between 69.95 to 62.53bps. ExHVOL outperformed LoVOL as the differential compressed to 0.76bps from 3.14bps, and remains below the short-term average of 3.09bps. The Main exFINLS to IG ExHVOL differential decompressed to 24.71bps from 22.53bps, and remains above the short-term average of 24.4bps.

The Emerging Market index is 1.1% less risky (3.3bps tighter) to 296.5bps. EM10 (Trend Tighter) is currently trading tight to its week's range at 0.17%, between 322.4 to 296.5bps. The HY-EM spread compressed to 450.42bps from 484.85bps, but remains below the short-term average of 513.33bps, with the HY/EM ratio falling to 2.52x, below its 5-day mean of 2.66x.

Commentary compliments of www.creditresearch.com

Index/Intrinsics Changes
CDR LQD 50 NAIG -2.42bps to 95.35 (8 wider - 36 tighter <> 36 steeper - 14 flatter).
CDX12 IG -2.75bps to 110.5 ($0.12 to $99.57) (FV -4.76bps to 122.11) (21 wider - 90 tighter <> 85 steeper - 39 flatter) - Trend Tighter.
CDX12 HVOL -2bps to 260 (FV -15.62bps to 290.46) (0 wider - 29 tighter <> 26 steeper - 4 flatter) - Trend Tighter.
CDX12 ExHVOL -2.99bps to 63.29 (FV -1.54bps to 72.27) (21 wider - 74 tighter <> 36 steeper - 59 flatter).
CDX11 XO -4.1bps to 309.4 (FV -14.87bps to 345.48) (5 wider - 27 tighter <> 24 steeper - 10 flatter) - Trend Tighter.
CDX12 HY (30% recovery) Px $+1.25 to $91 / -37.8bps to 747 (FV -33.64bps to 703.63) (6 wider - 84 tighter <> 73 steeper - 19 flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $+0.79 to $95 / -29.18bps to 663.9 - Trend Tighter.
MCDX12 0bps to 123bps. - No Trend.
CDR Counterparty Risk Index fell 2.7bps (-2.34%) to 112.31bps (1 wider - 13 tighter).
CDR Government Risk Index fell 1.77bps (-3.95%) to 43.11bps..
DXY weakened 0.38% to 76.8.
Oil rose $0.86 to $72.17.
Gold rose $4.05 to $996.35.
VIX fell 0.77pts to 23.55%.
10Y US Treasury yields fell 11.7bps to 3.36%.
S&P500 Futures gained 0.92% to 1042.