Daily Credit Summary: September 2 - Killing Me Softly
Spreads were broadly wider in the US as all the indices deteriorated (and while intraday ranges were extremely narrow, spreads gapped to their intraday wides at the close). We note that IG is at the swing wides from 8/19 and right at the 7/17-18 gap (certainly a notable technical level) and both IG and HY are at or very near their 50-day moving averages. Indices typically underperformed single-names (as single-name liquidity was very lose) with skews mostly narrower as IG underperformed but narrowed the skew, HVOL outperformed but widened the skew, ExHVOL intrinsics beat and narrowed the skew, XO underperformed but compressed the skew, and HY's skew widened as it underperformed.
The names having the largest impact on IG are Dow Chemical Company (-10bps) pushing IG 0.08bps tighter, and International Lease Finance Corp. (+28.23bps) adding 0.18bps to IG. HVOL is more sensitive with Dow Chemical Company pushing it 0.34bps tighter, and International Lease Finance Corp. contributing 0.79bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Weyerhaeuser Co (-7bps) pushing the index 0.07bps tighter, and Anadarko Petroleum Corp. (+6.92bps) adding 0.07bps to ExHVOL.
The price of investment grade credit fell 0.25% to around 98.09% of par, while the price of high yield credits fell 0.44% to around 87.06% of par. ABX market prices are higher (improving) by 0.04% of par or in absolute terms, 0.45%. Broadly speaking, CMBX market prices are lower by 0.03% of par or in absolute terms, 0.01%. Volatility (VIX) is down -0.25pts to 28.9%, with 10Y TSY rallying (yield falling) 5.9bps to 3.31% and the 2s10s curve flattened by 4.3bps, as the cost of protection on US Treasuries rose 0.79bps to 26bps. 2Y swap spreads tightened 2.6bps to 35.38bps, as the TED Spread tightened by 0.4bps to 0.2% and Libor-OIS deteriorated 0.1bps to 15.8bps.
The Dollar weakened with DXY falling 0.45% to 78.405, Oil falling $0.02 to $68.03 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 2.28% today (a 0.48% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $22.05 to $978.4 as the S&P is down (993.4 -0.31%) underperforming IG credits (124.5bps -0.53%) while IG, which opened wider at 123bps, underperforms HY credits. IG11 and XOver11 are -6.22bps and +17.75bps respectively while ITRX11 is +3.07bps to 98.25bps.
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 +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 increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.
Only 21% of IG credits are shifting by more than 3bps and 39% of the CDX universe are also shifting significantly (less than the 5 day average of 42%). The number of names wider than the index increased by 1 to 44 as the day's range fell to 2.75bps (one-week average 4.25bps), between low bid at 122 and high offer at 124.75 and higher beta credits (-0.07%) outperformed lower beta credits (0.37%).
In IG, wideners outpaced tighteners by around 4-to-3, with 58 credits notably wider. By sector, CONS saw 41% names wider, ENRGs 88% names wider, FINLs 48% names wider, INDUs 54% names wider, and TMTs 17% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 99.06bps and the latter at 101.52bps.
Cross Market, we are seeing the HY-XOver spread compressing to 236.09bps from 239.73bps, but remains above the short-term average of 228.79bps, with the HY/XOver ratio falling to 1.37x, below its 5-day mean of 1.38x. The IG-Main spread compressed to 26.25bps from 27.32bps, but remains above the short-term average of 25.21bps, with the IG/Main ratio falling to 1.27x, below its 5-day mean of 1.27x.
In the US, non-financials outperformed financials as IG ExFINLs are wider by 0.1bps to 101.5bps, with 44 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 0.79bps to 122.47bps, with Finance names (worst) wider by 5.48bps to 916.43bps, Banks (best) tighter by 1.75bps to 158.9bps, and Brokers tighter by 0.44bps to 153.58bps. Monolines are trading wider on average by 541.67bps (7.8%) to 4574.31bps.
In IG, FINLs underperformed non-FINLs (0.48% wider to 0.07% wider respectively), with the former (IG FINLs) wider by 1.4bps to 295.2bps, with 8 of the 21 names tighter. The IG CDS market (as per CDX) is 24.1bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (100.36bps), with the bond ETFs underperforming the IG CDS market by around 2.96bps.
In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 2.82bps to 99.06bps (with ITRX FINLs -trending wider- weaker by 4.04 to 95bps) and is currently trading at the wides of the week's range at 100%, between 99.06 to 92.03bps, and is trending wider. Main LoVOL (sideways trading) is currently trading at the wides of the week's range at 100.04%, between 69.59 to 64.74bps. ExHVOL underperformed LoVOL as the differential decompressed to 5.8bps from 5.68bps, but remains above the short-term average of 4.12bps. The Main exFINLS to IG ExHVOL differential decompressed to 23.67bps from 23.48bps, but remains below the short-term average of 24.01bps.
The Emerging Market index is 0.1% less risky (0.2bps tighter) to 325.1bps. EM10 (Trend Wider) is currently trading at the wides of the week's range at 98.4%, between 325.3 to 310.3bps. The HY-EM spread decompressed to 543.79bps from 529.48bps, but remains above the short-term average of 517.51bps, with the HY/EM ratio rising to 2.67x, above its 5-day mean of 2.63x.
Commentary courtesy of www.creditresearch.com
CDR LQD 50 NAIG -0.56bps to 103.87 (16 wider - 27 tighter <> 33 steeper - 17 flatter).
CDX12 IG +2bps to 124.5 ($-0.5 to $94.09) (FV +0.37bps to 132.6) (60 wider - 47 tighter <> 76 steeper - 49 flatter) - Trend Wider.
CDX12 HVOL 0bps to 280 (FV +0.69bps to 323.17) (11 wider - 14 tighter <> 18 steeper - 12 flatter) - Trend Wider.
CDX12 ExHVOL +2.63bps to 75.39 (FV +0.27bps to 76.76) (49 wider - 46 tighter <> 37 steeper - 58 flatter).
CDX11 XO +2.2bps to 323.5 (FV +1.47bps to 366.3) (16 wider - 12 tighter <> 16 steeper - 16 flatter) - Trend Wider.
CDX12 HY (30% recovery) Px $-0.44 to $87.06 / +14.1bps to 868.8 (FV +2.25bps to 766.95) (56 wider - 32 tighter <> 39 steeper - 53 flatter) - Trend Wider.
LCDX12 (65% recovery) Px $+0.03 to $92.73 / -1.24bps to 750.4 - Trend Wider.
MCDX12 0bps to 125bps. - Trend Wider.
CDR Counterparty Risk Index rose 0.99bps (0.81%) to 122.67bps (10 wider - 4 tighter).
CDR Government Risk Index rose 0.81bps (1.79%) to 45.81bps..
DXY weakened 0.45% to 78.41.
Oil fell $0.02 to $68.03.
Gold rose $22.05 to $978.4.
VIX fell 0.25pts to 28.9%.
10Y US Treasury yields fell 5.7bps to 3.31%.
S&P500 Futures lost 0.31% to 993.4.