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

Index/Intrinsics Changes
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.

Comments

[Anonymous]

Not too many comments on this one ,eh?

[AN0NYM0US]

A good read from David Fry

_{There are only two conditions and markets worthy of comment today before tomorrow’s employment data: the ongoing annoying and manipulative end of day “jam jobs” and the action in gold.}

Looking at the 5 minute SPY chart you can see ultra-light total volume and the big “stick save” into the close. What can we infer from this?

1. Someone knows the employment data and is front-running it believing it to be positive.
2. Someone wants to squeeze some shorts for fun and profit since volume is ultra-light and they have the resources/muscle to do it.
3. These are the types of activities that are the stuff for conspiracy theories regarding direct or indirect government meddling in and propping of markets.
4. Where’s the SEC to investigate this type of trading especially if it’s derived from inside information? Oh, they’re busy playing nanny to leveraged ETFs and other low hanging fruit....

http://www.etfdigest.com/davesDaily.php?id=894

[AN0NYM0US]

and sure to be one of the big stories tomorrow

Ex-Met Dykstra (and contributor to TheStreet.com) Accused of Taking $40,000 French Stove

http://www.bloomberg.com/apps/news?pid=20601109&sid=aTHeAOobL7i4

Dykstra, 46, known as “Nails” by fans for his aggressive playing style, became an entrepreneur after injuries ended his career, opening a chain of car washes, a subscription Web site that offered stock picks and The Players Club.

The ballplayer owes almost $1 million to jet charter services...

http://www.thestreet.com/author/1100645/LennyDykstra/all.html

[Lionhead]

Poor chap, he's in a bit of a sticky wicket...  Maybe bonds would have been a better investment for him.

[gookempucky]

Could you guys burn us a ST/ LT chart on the CDR---seems one to keep an eye on.

Thanks

[My cognitive di...]

I've taken a laxative and a sleeping pill and now I'm going to read why there are only 5 comments to this Dog Day Divergence.

[Anonymous]

ZH, thought you would find this of interest:

Technologies of Compliance: Risk and Regulation in a Digital Age http://ssrn.com/abstract=1463727

Legal scholarship has been silent about a phenomenon with profound implications for governance: the automation of compliance with laws mandating risk management. Regulations - from bank capitalization rules, to Sarbanes-Oxley’s provisions on financial fraud and misrepresentation, to laws governing information privacy protection - frequently require regulated firms to develop internal processes to identify, assess, and mitigate risk. To comply, firms have turned wholesale to technology systems and computational analytics that measure and predict corporate risk levels, and 'force' decisions accordingly. In total, the third-party market for compliance-technology products, known generally as “governance, risk and compliance” (GRC) software, systems and services, alone grew to $60 billion last year, and this growth is poised to increase exponentially.

While these technology systems offer powerful compliance tools, they also generate risks of their own. They permit computer programmers to interpret legal requirements; they mask the uncertainty of the very hazards with which policymakers are concerned; they skew decisionmaking through an 'automation bias' that privileges personal self-interest over sound judgment; and their lack of transparency thwarts oversight and accountability. These phenomena played a critical role in the recent financial crisis.

This Article explores these developments and the failure of risk regulation to address them, and proposes specific reform measures for policymakers revisiting the governance of systemic risk. While regulators have lauded the turn to technology, they have ignored its perils. This Article argues for more activist regulator oversight backed by sanctions before disaster has occurred. But it also emphasizes collaboration in developing risk-management systems, drawing both on the granular expertise of firms and the broader vantage of administrative agencies. Most importantly, it seeks better to reflect the human decisionmaking element at both levels: to recognize the ways in which technology can hinder good judgment, to reintroduce human inputs in the decision process, and to reflect the limits of both human and computer reasoning.

Over and out.