Daily Credit Summary: September 2 - Price Not Volume
Courtesy of www.creditresearch.com
Spreads compressed for the second day in a row modestly outperforming stocks as the big volume day from yesterday saw very little activity today as the path of least resistance appears higher for now. Intraday ranges today in credit were very narrow as what two-way flow there was seemed more concentrated in HY than IG for a change.
A marginally better than expected jobs number along with a bounce-along-the-bottom existing home sales print was enough to maintain yesterday's momentum as equity and credit markets trended almost perfectly consistently back to the 8/19 pre-500k initial claims/Philly Fed plunge levels. Volume in S&P futures was one of the lowest of the SEP contract and while we drifted tighter in IG and HY, run volume was way down and most dealers commented on a lack of real flow - mostly reracking with stocks to try and catch some attention.
IG and HY managed to peak back above yesterday's tights early on but that was the last we saw of that and they drifted tighter all day - HY more consistently than IG, which was actually a little choppy. Both closed at their best levels of the day and at their tightest closing level since 8/18 though notably today's tights in HY and IG were a good few bps wide of the tights on that day. It may be worth remembering that the last time we saw ~115/6 swing wide (on 7/20) we screamed tighter to 99.5bps intraday within six days only to bounce back very quickly wider. In this case we have compressed from 116bps wides on 8/25 to 106bps today (7 days) and are holding above the 104.375bps intraday swing tight from that swing (for now).
Our super-short-term trading pivot is still long credit (from 111.5bps and 593bps for IG and HY respectively), stops never hit today and we would inch our stop to 110bps in IG and 590bps in HY but we get the sense that tomorrow's action will be early and extreme based on the NFP print. 112.25bps and 600bps are entry levels for the short credit should we run so not much room given the recent vol - and anxiety levels high into a long weekend. HY, IG, and the S&P all now closed above their 50-day averages so that offers some support for now but has offered little critical insight in recent weeks.
Indices outperformed intrinsics today, pushing skews further (indices richer to fair) which we suspect will bring some arbs out of the bushes next week (when we hope liquidity returns) into the roll - though it might still be a little early. In the opposite of yesterday, today saw HY off-the-run outperforming on-the-runs (roll/curve steepening) and IG9 slightly underperforming IG14 but as we said above liquidity was chunky at best so time mismacthes are easy there.
FINLs continued their two-day screamfest as the worst of the last few weeks becomes the best here again - suggesting more covering than real risk being added in our opinion. Breadth was impressively positive (as it tends to be totally correlated to the indices much like in equity land) but insurers, consumer finance, and majors were all better in financial-land today. HRB beat expectations after hours and screamed in - probably will support moves tomorrow in FINLs but tomorrow will be all about jobs and after that nuance - especially given the long weekend.
Across the broad CDS universe we track, spreads were on average 1.2% tighter with little interest in anything but 5Y risk. Interestingly given that HY outperformed IG top-down on a beta-adjusted and absolute basis, we did not see this in single-names. There was a clear preference for BBB+-rated credits and above, some decent performance in crossover, but below that a general unwillingness to be taking on too levered risk.
No real surprise but Consumer Cyclicals (helped by a nice leg tighter in builders) were the best performing sector today. Financials followed (with Consumer Finance the best in that group) and the 'safe' havens of Utilities and NonCyclicals were the worst performers (though saw average spread compression) - the rotation see-saw continues.
On a DV01-adjusted basis, HRB was the best performer of the day (mostly after-hours) followed by Lennar, KBHome, Anadarko, SLM, FDC, Freescale, Realogy, El Paso, Eastman Kodak, and Standard-Pacific. So a smattering of builders and levered firms/tail names suggests some correlation players at work - which fits with the Top-CDO referenced names outperforming the broad market quite handily while LBO-prone names actually underperformed - which also makes sense. On that line Pactiv was the worst performer of the day (DV01-weighted) followed by Wendy's, Expedia, Dole Food, Dean Foods, and Apache (gulf fire/spill).
One final thought on risk-on thinking. IG is at pretty much its closing level from 8/18 but HY is 15bps or so wider from that context with the S&P marginally lower but VIX around 1.5pts lower. Our stock/vol context would see these washing and HY should be 15bps tighter than it is. We have indicated a general preference change between stocks and credit that has been there for a few weeks on a more systemic level and today's 17th week in a row of equity outflows seems to suggest nothing new under the sun on that BUT what we do think is changing is a slight risk appetite shift as the IG safety trumps HY carry for now - it is clear that HY's strong performance of the last two days appears very risk hungry (40bps or so) but it is very notably underperforming the S&P's impressive move on a beta-adjusted basis. The HY-IG differential is not confirming this move in the S&P either and we note VIX is notably below the HY spread context (and take a look at VIX/VXV as an indication of short-term euphoria driving the term structure steeper in vol - not normally a good sign).
We also remind readers that in the context of AUDJPY (FX carry) and 2s10s30s (TSY carry), the S&P looks 10-15pts expensive too (which fits with the divergence between credit and equity also). Of course the asset allocation hangover from yesterday will disrupt that temporarily, as the marginal stock buyer trumps the credit buyer, but these relationships tend to converge sooner rather than later and perhaps tomorrow's job print is the catalyst.
Movers in Detail
Spreads were mixed in the US with IG tighter, HVOL wider, ExHVOL better, and HY rallying. IG trades 3.7bps tight (rich) to its 50d moving average, which is a Z-Score of -0.6s.d.. At 106.38bps, IG has closed tighter on 154 days in the last 431 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. HY trades 32.9bps wide (cheap) to its 50d moving average, which is a Z-Score of -0.5s.d. and at 569.01bps, HY has closed tighter on 102 days in the last 431 trading days (JAN09).
Indices generally outperformed intrinsics with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL underperformed but widened the skew, ExHVOL outperformed pushing the skew wider, HY outperformed pushing the skew wider.
Comparing the relative HY and IG moves to their 50-day rolling beta, we see that HY outperformed by around 2.5bps (or 15%). Interestingly, based on short-run empirical betas between IG, HY, and the S&P, stocks underperformed HY by an equivalent 4.6bps (~ 28%), and stocks underperformed IG by an equivalent 0.4bps (~ 16%) - (implying IG outperformed HY (on an equity-adjusted basis)).
The names having the largest impact on IG are SLM Corp (-27.09bps) pushing IG 0.17bps tighter, and Reynolds American Inc. (+1.45bps) adding 0.01bps to IG. HVOL is more sensitive with SLM Corp pushing it 0.73bps tighter, and Reynolds American Inc. contributing 0.05bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Anadarko Petroleum Corp. (-22.5bps) pushing the index 0.21bps tighter, and ConocoPhillips (+1bps) adding 0.01bps to ExHVOL.
The price of investment grade credit rose 0.11% to around 99.73% of par, while the price of high yield credits rose 0.6% to around 97.38% of par. ABX market prices are lower by 0.03% of par or in absolute terms, 0.04%. Volatility (VIX) is down -0.7pts to 23.19%, with 10Y TSY selling off (yield rising) 5bps to 2.63% and the 2s10s curve steepened by 5bps, as the cost of protection on US Treasuries fell 1.71bps to 46.04bps. 2Y swap spreads widened 0.8bps to 19.13bps, as the TED Spread widened by 0.1bps to 0.17% and Libor-OIS improved 0.3bps to 10.7bps.
The Dollar weakened with DXY falling 0.15% to 82.402, Oil rising $1.11 to $75.02 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 0.94% today (a 1.35% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $6.95 to $1251.25 as the S&P rallies (1088.9 0.67%) outperforming IG credits (106.38bps 0.11%) while IG, which opened tighter at 108.25bps, underperforms HY credits. IG13 and XOver13 are -4bps and -15.5bps respectively while ITRX13 is -3.87bps to 108.38bps.
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), and additionally the ratio has dropped below 0.9x which is exceptionally bearish for stocks and spreads.
Dispersion fell -2.7bps 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 increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.
37% of IG credits are shifting by more than 3bps and 44% of the CDX universe are also shifting significantly (more than the 5 day average of 43%). The number of names wider than the index decreased by 1 to 57 as the day's range fell to 2.75bps (one-week average 3.63bps), between low bid at 106 and high offer at 108.75 and higher beta credits (-2.37%) outperformed lower beta credits (-1.82%).
In IG, tighteners outpaced wideners by around 13-to-1, with 8 credits wider. By sector, CONS saw 8% names wider, ENRGs 12% names wider, FINLs 11% names wider, INDUs 0% names wider, and TMTs 4% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG exFINLs) with the former trading at 102.23bps and the latter at 105.81bps.
Cross Market, we are seeing the HY-XOver spread compressing to 77.51bps from 78.22bps, but remains above the short-term average of 77.09bps, with the HY/XOver ratio rising to 1.16x, above its 5-day mean of 1.15x. The IG-Main spread decompressed to -2bps from -3.25bps, but remains above the short-term average of -3.72bps, with the IG/Main ratio rising to 0.98x, above its 5-day mean of 0.97x. Among the HY names, we see higher risk names (>500bps) outperforming lower risk (<500bps) names. In the IG names, we see higher beta names outperforming lower beta names.
In the US, non-financials underperformed financials as IG ExFINLs are tighter by 2.2bps to 105.8bps, with 84 of the 106 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 4.67bps to 133.03bps, with Brokers (worst) tighter by 5.5bps to 182.5bps, Finance names (best) tighter by 14.46bps to 431.85bps, and Banks tighter by 5.5bps to 127.33bps. Monolines are trading tighter on average by -2.15bps (0.05%) to 3102.05bps.
In IG, FINLs outperformed non-FINLs (2.74% tighter to 2.02% tighter respectively), with the former (IG FINLs) tighter by 4.9bps to 172.6bps, with 17 of the 19 names tighter. The IG CDS market (as per CDX) is -9.9bps rich (we'd expect LQD to outperform TLH) to the LQD-TLH-implied valuation of investment grade credit (116.31bps), with the bond ETFs outperforming the IG CDS market by around 1.36bps.
In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 3.46bps to 102.23bps (with ITRX FINLs -trending tighter- better by 5.5 to 133bps) and is currently trading tight to its week's range at 0%, between 110.59 to 102.23bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at -0.01%, between 99.03 to 90.58bps. ExHVOL outperformed LoVOL as the differential compressed to -4.13bps from -3.13bps, but remains below the short-term average of -2.25bps.
The Main exFINLS to IG ExHVOL differential decompressed to 15.78bps from 14.65bps, but remains above the short-term average of 13.8bps. We also note that low beta credits are underperforming high beta credits in Main with the low beta (DV01-weighted) index at around 112.8bps, and the high-beta index around 116.4bps, compared to Main (intrinsics) at 114.3bps.
The Emerging Market index is 0.4% less risky (1bps tighter) to 265.8bps. EM (Trend Tighter) is currently trading in the middle of the week's range at 26.1%, between 278.4 to 261.4bps. The HY-EM spread compressed to 303.17bps from 318.34bps, but remains below the short-term average of 325.23bps, with the HY/EM ratio falling to 2.14x, below its 5-day mean of 2.21x.
CDR LQD 50 NAIG -2.99bps to 103.35 (3 wider - 43 tighter <> 23 steeper - 25 flatter).
CDR Counterparty Risk Index fell 4.77bps (-3.46%) to 132.94bps (0 wider - 14 tighter).
CDR Government Risk Index fell 3.23bps (-3.1%) to 100.95bps..
CDX14 IG -2.75bps to 106.25 ($0.12 to $99.73) (FV -2.51bps to 115.78) (9 wider - 100 tighter <> 60 steeper - 62 flatter) - Trend Tighter.
CDX14 HVOL +3.64bps to 169.5 (FV -4.07bps to 0) (3 wider - 26 tighter <> 14 steeper - 16 flatter) - Trend Wider.
CDX14 ExHVOL -4.77bps to 86.28 (FV -2.04bps to 95.1) (6 wider - 89 tighter <> 49 steeper - 46 flatter).
CDX14 HY (30% recovery) Px $+0.6 to $97.38 / -16.2bps to 569 (FV -6.8bps to 605.95) (17 wider - 77 tighter <> 59 steeper - 41 flatter) - Trend Tighter.
LCDX14 (70% recovery) Px $+0.25 to $95.75 / -7.25bps to 364.92 - Trend Tighter.
MCDX14 -3.64bps to 223.86bps. - Trend Tighter.
ITRX13 Main -3.87bps to 108.38bps (FV-3.56bps to 114.26bps).
ITRX13 Xover -15.5bps to 491.5bps (FV-11.47bps to 488.16bps).
ITRX13 FINLs -5.5bps to 133bps (FV-5.24bps to 138.44bps).
DXY weakened 0.07% to 82.46.
Oil rose $1.11 to $75.02.
Gold rose $6.95 to $1251.25.
VIX fell 0.7pts to 23.19%.
10Y US Treasury yields rose 5bps to 2.62%.
S&P500 Futures gained 0.67% to 1088.9.
The biggest absolute movers in IG were Reynolds American Inc. (+1.45bps), Transocean Ltd. (+1.25bps), and ConocoPhillips (+1.1bps) in the underperformers, and SLM Corp (-27.09bps), Anadarko Petroleum Corp. (-22.5bps), and Dell Inc. (-11.02bps) in the outperformers. The biggest percentage movers in IG were ConocoPhillips (+2.1%), XTO Energy Inc (+2.03%), and Sara Lee Corp. (+1.23%) in the underperformers, and Dell Inc. (-9.97%), International Business Machines Corp. (-7.51%), and Black & Decker Corporation (-6.99%) in the outperformers.
In Main, the biggest percentage movers were Fortum Oyj (+1.58%), Cadbury Holdings Limited (+1.57%), and STMicroelectronics N.V. (+0.65%) in the underperformers, and Hannover Rueckversicherung AG (-8.74%), Telefonica SA (-8.47%), and Zurich Insurance Company (-6.49%) in the outperformers.The largest absolute movers in Main were Fortum Oyj (+0.86bps), STMicroelectronics N.V. (+0.5bps), and Cadbury Holdings Limited (+0.38bps) in the underperformers, and Hellenic Telecommunications Organization SA (-17.5bps), Telefonica SA (-14.21bps), and Xstrata Plc (-13bps) in the outperformers.
The biggest percentage movers in XOver were BCM Ireland Finance Ltd (+0.91%), Sol Melia SA (+0.34%), and Cable & Wireless Plc (+0.11%) in the underperformers, and Stora Enso Oyj (-11%), Norske Skogindustrier ASA (-9.39%), and UPM-Kymmene Oyj (-8.11%) in the outperformers.The largest absolute movers in XOver were BCM Ireland Finance Ltd (+20.31bps), Sol Melia SA (+2.45bps), and Seat Pagine Gialle SpA (+2.1bps) in the underperformers, and Norske Skogindustrier ASA (-116.73bps), ONO Finance, PLC (-44.06bps), and Stora Enso Oyj (-34bps) in the outperformers.
In the names of the HY index, the biggest percentage movers were Host Hotels & Resorts, L.P. (+2.05%), Dole Food Company, Inc. (+1.41%), and Dean Foods Co. (+1.39%) in the underperformers, and Lennar Corp. (-6.7%), EL Paso Corp (-4.67%), and KB Home (-4.65%) in the outperformers. The largest absolute movers in HY were Dole Food Company, Inc. (+10.55bps), Dean Foods Co. (+9.98bps), and Energy Future Holdings Corp. (+9.73bps) in the underperformers, and First Data Corp (-35.57bps), Lennar Corp. (-35bps), and Realogy Corporation (-32.42bps) in the outperformers.
The CDR Counterparty Risk Index Series 2 (of brokers and banks) fell -4.77bps (or -3.46%) to 132.94bps. Dresdner Bank AG (-2.71bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Royal Bank of Scotland Group Plc (-1.73%) is the worst (relative) performer. Citigroup Inc (-8bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and JP Morgan Chase & Co. (-5.74%) is the best (relative) performer.
The CDR Aussie Index fell -2.52bps (or -2.25%) to 109.42bps. BHP Billiton Ltd (1.75bps) is the worst (absolute) performer, whilst BHP Billiton Ltd (1.59%) is the worst (relative) performer. Macquarie Bank Limited (-7.82bps) is the best (absolute) performer, and Macquarie Bank Limited (-3.72%) is the best (relative) performer.
The CDR Asian Index fell -1.32bps (or -1.17%) to 111.81bps. Kobe Steel Ltd (9.52bps) is the worst (absolute) performer, whilst Kobe Steel Ltd (9.66%) is the worst (relative) performer. ICICI Bank Limited (-5.15bps) is the best (absolute) performer, and East Japan Railway Company (-4.66%) is the best (relative) performer.