Daily Credit Summary: September 3 - Dog Day Divergence
Spreads were mixed in the US with all but HY marginally tighter (indices saw very small intraday ranges once again and closed well off their best levels unlike equities). Indices typically underperformed single-names (liquidity was minimal in single-names as dealer notched down spreads to encourage some action in low spread names) with skews mostly narrower as IG underperformed but narrowed the skew, HVOL underperformed but narrowed 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.
A minuscule 7.2% of names in IG moved more than their historical vol would imply as higher vol names outperformed lower vol names by -1.12% to -0.47%. IG's vol is around 4.38% per 1 day period, which leaves 98 names higher vol and 27 lower vol than the index.
The names having the largest impact on IG are International Lease Finance Corp. (-13.45bps) pushing IG 0.09bps tighter, and Weyerhaeuser Co (+11bps - downgrade) adding 0.09bps to IG. HVOL is more sensitive with International Lease Finance Corp. pushing it 0.38bps tighter, and American International Group, Inc. contributing 0.35bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Capital One Bank (-5.25bps) pushing the index 0.06bps tighter, and Weyerhaeuser Co (+11bps) adding 0.11bps to ExHVOL.
The price of investment grade credit rose 0.03% to around 99.03% of par, while the price of high yield credits fell 0% to around 87.13% of par. ABX market prices are higher (improving) by 0.06% of par or in absolute terms, 0.18%. Broadly speaking, CMBX market prices are higher (improving) by 0% of par or in absolute terms, 0%. Volatility (VIX) is down -1.8pts to 27.1%, with 10Y TSY selling off (yield rising) 3.1bps to 3.34% and the 2s10s curve steepened by 1.5bps, as the cost of protection on US Treasuries rose 0.75bps to 26.75bps. 2Y swap spreads widened 0.8bps to 36.44bps, as the TED Spread tightened by 0.4bps to 0.2% and Libor-OIS improved 1.8bps to 13.7bps.
The Dollar strengthened with DXY rising 0.1% to 78.452, Oil rising $0.08 to $68.13 (outperforming the dollar as the value of Oil (rebased to the value of gold) fell by 1.25% today (a 0.22% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $13.55 to $992.05 as the S&P rallies (1001.8 0.76%) outperforming IG credits (123.5bps 0.03%) while IG, which opened tighter at 123bps, outperforms HY credits. IG11 and XOver11 are -7.95bps and -10bps respectively while ITRX11 is -0.25bps to 98.13bps.
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).
Dispersion fell -0.4bps 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 24% 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 44%). The number of names wider than the index stayed at 44 as the day's range rose to 4.5bps (one-week average 4.5bps), between low bid at 120.75 and high offer at 125.25 and higher beta credits (-1.09%) outperformed lower beta credits (-0.93%).
In IG, wideners were outpaced by tighteners by around 3-to-1, with 28 credits wider. By sector, CONS saw 22% names wider, ENRGs 25% names wider, FINLs 10% names wider, INDUs 32% names wider, and TMTs 22% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 99.16bps and the latter at 100.61bps.
Cross Market, we are seeing the HY-XOver spread decompressing to 246.09bps from 236.09bps, but remains above the short-term average of 233.36bps, with the HY/XOver ratio rising to 1.4x, above its 5-day mean of 1.38x. The IG-Main spread compressed to 25.37bps from 25.87bps, and remains below the short-term average of 25.61bps, with the IG/Main ratio falling to 1.26x, below its 5-day mean of 1.27x.
In the US, non-financials underperformed financials as IG ExFINLs are tighter by 1bps to 100.6bps, with 64 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 1.56bps to 120.74bps, with Brokers (worst) tighter by 0bps to 152.83bps, Banks (best) tighter by 3.32bps to 155.37bps, and Finance names tighter by 8.45bps to 907.08bps. Monolines are trading wider on average by 249.86bps (3.77%) to 4663.11bps as FGIC rumors circulated.
In IG, FINLs outperformed non-FINLs (1.16% tighter to 0.95% tighter respectively), with the former (IG FINLs) tighter by 3.4bps to 292.1bps, with 17 of the 21 names tighter. The IG CDS market (as per CDX) is 28.2bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (95.25bps), with the bond ETFs outperforming the IG CDS market by around 4.35bps.
In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 0.19bps to 99.16bps (with ITRX FINLs -trending wider- better by 0.5 to 94bps) and is currently trading at the wides of the week's range at 97.4%, between 99.35 to 92.03bps, and is trending wider. Main LoVOL (trend wider) is currently trading at the wides of the week's range at 99.8%, between 69.76 to 64.74bps. ExHVOL outperformed LoVOL as the differential compressed to 4.01bps from 4.36bps, and remains below the short-term average of 4.3bps. The Main exFINLS to IG ExHVOL differential decompressed to 25.4bps from 25.23bps, but remains above the short-term average of 24.12bps.
In the names of the HY index, today's biggest percentage movers were AMR Corp (+13.57%), Constellation Brands, Inc. (+3.85%), and Dole Food Company, Inc. (+3.38%) in the wideners, and K Hovnanian Enterprises, Inc. (-10.57%), Ford Motor Company (-8.46%), and Frontier Communications Corporation (-5.25%) in the tighteners. The largest absolute movers in HY were AMR Corp (+1093.39bps), Smithfield Foods Inc (+34.9bps), and Harrah's Operating Co Inc (+25.56bps) in the wideners, and K Hovnanian Enterprises, Inc. (-182.53bps), Ford Motor Company (-86.78bps - outlook change), and Beazer Homes USA Inc (-60.56bps) in the tighteners.
Commentary compliments of www.creditresearch.com
CDR LQD 50 NAIG -1.69bps to 102.06 (10 wider - 31 tighter <> 21 steeper - 28 flatter).
CDX12 IG -0.75bps to 123.5 ($0.03 to $99.03) (FV -1.35bps to 131.3) (28 wider - 79 tighter <> 52 steeper - 73 flatter) - Trend Wider.
CDX12 HVOL -2bps to 281 (FV -4.05bps to 319.13) (1 wider - 24 tighter <> 15 steeper - 15 flatter) - Trend Wider.
CDX12 ExHVOL -0.3bps to 73.76 (FV -0.54bps to 76.2) (27 wider - 68 tighter <> 58 steeper - 37 flatter).
CDX11 XO -5.2bps to 318.3 (FV +1.88bps to 367) (8 wider - 22 tighter <> 15 steeper - 18 flatter) - Trend Wider.
CDX12 HY (30% recovery) Px $0 to $87.13 / 0bps to 866.8 (FV -4.95bps to 762.6) (28 wider - 58 tighter <> 48 steeper - 42 flatter) - Trend Wider.
LCDX12 (65% recovery) Px $+0.16 to $92.81 / -6.48bps to 747.35 - Trend Wider.
MCDX12 0bps to 125bps. - No Trend.
CDR Counterparty Risk Index fell 1.68bps (-1.37%) to 120.62bps (3 wider - 11 tighter).
CDR Government Risk Index rose 0.82bps (1.79%) to 46.73bps..
DXY strengthened 0.1% to 78.45.
Oil rose $0.04 to $68.09.
Gold rose $13.7 to $992.2.
VIX fell 1.8pts to 27.1%.
10Y US Treasury yields rose 3.3bps to 3.34%.
S&P500 Futures gained 0.82% to 1002.4.