Daily Credit Summary: September 28 - Divergent Dullness
Spreads were tighter in the US as all the indices improved (though were unable to break Friday's tights and closed wider than Thursday's close). IG trades only 8.1bps tight (rich) to its 50d moving average, which is a Z-Score of -0.7s.d. At 105bps, IG has closed tighter on only 8 days so far this year (192 trading days). The last five days have seen IG converging to its 50d moving average.
Most notably from our perspective, ignoring the Yom Kippur quietness, was the flattening of IG curves, IG12-13 decompression, IG9-12 decompression, and HY stoicism in the face of its roll tomorrow. Given the relatively low liquidity (and extremely low volumes in equity land), it is perhaps understandable that month-/quarter-end window-dressing was able to maintain risky assets near period highs in the face of other asset-class divergence.
Indices generally outperformed intrinsics with skews mostly narrower as IG outperformed but narrowed the skew, HVOL underperformed but widened the skew, ExHVOL outperformed but narrowed the skew, XO underperformed but compressed the skew, and HY outperformed but narrowed the skew.
IG13 additions were mixed with JCI and GATX best, RAI and UNH unch, and DTV and KMP wider as we see IG13 trading cheaper to intrinsics than IG12 as intrinsics roll around 10-11bps. HY13 intrinsics trade around 20-30bps wider than HY12 and given HY12's relative cheapness to intrinsics we suspect HY13 might be slightly more appealing for shorts (if pressure holds the skew narrower), but this one will be worth watching from the open.
IG and HY both closed wider than their Thursday closes whereas SPY closed above last Wednesday's close and we wonder with the relative dullness this afternoon and outperformance of stocks whether we will see a 'told-you-so-dance' moment as equities stall back to dollar/TSY-implied levels as the window-dressing period is increasingly gamed earlier and earlier. We cant help but think a short 7.8x UUP vs short 1xSPY trade will converge nicely in the short-term.
The names having the largest impact on IG are XL Capital Limited (-10bps) pushing IG 0.08bps tighter, and CIT Group Inc (+30.04bps) adding 0.14bps to IG. HVOL is more sensitive with XL Capital Limited pushing it 0.37bps tighter, and CIT Group Inc contributing 0.6bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Textron Financial Corp (-9.5bps) pushing the index 0.1bps tighter, and Alcoa Inc. (+5bps) adding 0.05bps to ExHVOL.
The price of investment grade credit rose 0.15% to around 99.79% of par, while the price of high yield credits rose 0.43% to around 94.81% of par. ABX market prices are higher (improving) by 0.07% of par or in absolute terms, 0.14%. Broadly speaking, CMBX market prices are higher (improving) by 0% of par or in absolute terms, 0%. Volatility (VIX) is down -0.73pts to 24.88%, with 10Y TSY rallying (yield falling) 4.2bps to 3.28% and the 2s10s curve flattened by 2.6bps, as the cost of protection on US Treasuries fell 2bps to 21bps. 2Y swap spreads tightened 0.3bps to 31.38bps, as the TED Spread widened by 1.1bps to 0.2% and Libor-OIS deteriorated 0.5bps to 11.7bps.
The Dollar strengthened with DXY rising 0.13% to 76.914, Oil rising $1.06 to $67.08 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 1.63% today (a 1.74% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $0.25 to $990.75 as the S&P rallies (1059.6 1.78%) outperforming IG credits (105bps 0.15%) while IG, which opened tighter at 108.25bps, underperforms HY credits. IG11 and XOver11 are -0.1bps and -6.92bps respectively while ITRX11 is +1.83bps to 87.75bps.
Dispersion rose 2.9bps in IG. Broad market dispersion is in line with historical expectations given current spread levels, showing investors fairly well balanced, with dispersion increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.
Only 19% of IG credits are shifting by more than 3bps and 37% of the CDX universe are also shifting significantly (less than the 5 day average of 49%). The number of names wider than the index increased by 2 to 42 as the day's range rose to 5.75bps (one-week average 5.6bps), between low bid at 103 and high offer at 108.75 and higher beta credits (-0.64%) outperformed lower beta credits (-0.24%).
In IG, tighteners outpaced wideners by around 1.3-to-1, with 45 credits notably wider. By sector, CONS saw 32% names wider, ENRGs 38% names wider, FINLs 29% names wider, INDUs 54% names wider, and TMTs 26% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 91.56bps and the latter at 79.12bps.
Cross Market, we are seeing the HY-XOver spread compressing to 153.38bps from 165.7bps, but remains above the short-term average of 147.75bps, with the HY/XOver ratio falling to 1.32x, above its 5-day mean of 1.3x. The IG-Main spread compressed to 17.25bps from 22.58bps, and remains below the short-term average of 18.68bps, with the IG/Main ratio falling to 1.2x, below its 5-day mean of 1.22x.
In the US, non-financials outperformed financials as IG ExFINLs are tighter by 0.3bps to 79.1bps, with 48 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 1.9bps to 95.8bps, with Finance names (worst) wider by 3.7bps to 636.26bps, Brokers (best) tighter by 6.17bps to 121.83bps, and Banks tighter by 1.54bps to 127.58bps. Monolines are trading wider on average by 18.38bps (1.06%) to 3148.43bps.
In IG, FINLs underperformed non-FINLs (0.15% tighter to 0.36% tighter respectively), with the former (IG FINLs) tighter by 0.3bps to 221bps, with 11 of the 21 names tighter. The IG CDS market (as per CDX) is 17.1bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (87.94bps), with the bond ETFs underperforming the IG CDS market by around 5.6bps.
In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 2.57bps to 91.56bps (with ITRX FINLs -trading sideways- better by 1.13 to 72.5bps) and is currently trading at the wides of the week's range at 100%, between 91.56 to 82.56bps, and is trending wider. Main LoVOL (trend wider) is currently trading at the wides of the week's range at 99.96%, between 67.78 to 58.49bps. ExHVOL outperformed LoVOL as the differential compressed to 1.51bps from 8.05bps, and remains below the short-term average of 3.7bps. The Main exFINLS to IG ExHVOL differential decompressed to 22.28bps from 15.26bps, and remains above the short-term average of 19.93bps.
Commentary compliments of www.creditresearch.com
CDR LQD 50 NAIG -1.65bps to 78.34 (11 wider - 34 tighter <> 28 steeper - 22 flatter).
CDX13 IG -3.5bps to 96.5 ($0.5 to $100.14) (FV -0.34bps to 91.94) (45 wider - 58 tighter <> 69 steeper - 54 flatter) - Trend Wider.
CDX13 HVOL 0bps to 185 (FV -0.95bps to 173.8) (10 wider - 16 tighter <> 17 steeper - 12 flatter) - No Trend.
CDX13 ExHVOL -4.61bps to 68.55 (FV -0.16bps to 66.86) (35 wider - 60 tighter <> 43 steeper - 52 flatter).
CDX12 IG -4bps to 104.5 ($0.17 to $99.81) (FV -0.32bps to 102.17) (45 wider - 59 tighter <> 75 steeper - 48 flatter) - Trend Wider.
CDX12 HVOL -0.5bps to 218.1 (FV -0.65bps to 214.72) (10 wider - 16 tighter <> 22 steeper - 8 flatter) - No Trend.
CDX12 ExHVOL -5.11bps to 68.63 (FV -0.24bps to 68.39) (35 wider - 60 tighter <> 42 steeper - 53 flatter).
CDX11 XO -0.3bps to 264.3 (FV -1.82bps to 280.14) (10 wider - 19 tighter <> 20 steeper - 13 flatter) - No Trend.
CDX12 HY (30% recovery) Px $+0.5 to $94.88 / -13.9bps to 635.6 (FV -0.09bps to 581.6) (43 wider - 46 tighter <> 48 steeper - 44 flatter) - Trend Wider.
CDX13 HY (30% recovery) (FV -0.39bps to 596.61) (44 wider - 50 tighter <> 50 steeper - 47 flatter) - Trend Wider.
LCDX12 (65% recovery) Px $+0.2 to $98.85 / -6.2bps to 534.87 - No Trend.
MCDX12 -3.67bps to 90bps. - No Trend.
CDR Counterparty Risk Index fell 1.9bps (-1.94%) to 95.8bps (5 wider - 9 tighter).
CDR Government Risk Index fell 0.31bps (-0.71%) to 42.61bps..
DXY strengthened 0.13% to 76.91.
Oil rose $1.06 to $67.08.
Gold fell $0.25 to $990.75.
VIX fell 0.73pts to 24.88%.
10Y US Treasury yields fell 4bps to 3.28%.
S&P500 Futures gained 1.78% to 1059.6.