Daliy Credit Summary: July 14 - Steeper and Flatter
Spreads were tighter in the US as all the indices improved (with credit curves flattening/inverting in the face of significant TSY steepening today). Indices generally outperformed intrinsics with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew, ExHVOL outperformed pushing the skew wider, XO's skew increased as the index outperformed, and HY's skew widened as it underperformed.
Only 11.2% of names in IG moved more than their historical vol would imply as higher vol names underperformed lower vol names by -1.53% to -2.53%. Intraday ranges for IG and HY were very low at 4bps and 24bps respectively as IG held at one-week tights closing just under the magic 140bps level (the range-bound market continues) as investors seemed to turn their attention to LCDX more than HY today.
The names having the largest impact on IG are CIT Group Inc (-144.58bps but swung between -300bps and unch intraday with a late surge of profit-taking seeming enough to drag it 1-2pts tighter) pushing IG 0.64bps tighter, and International Lease Finance Corp. (+199.13bps) adding 1.25bps to IG. HVOL is more sensitive with CIT Group Inc pushing it 2.9bps tighter, and International Lease Finance Corp. contributing 5.65bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Valero Energy Corp. (-15bps) pushing the index 0.15bps tighter, and Devon Energy Corporation (+8bps) adding 0.08bps to ExHVOL.
The price of investment grade credit rose 0.12% to around 98.37% of par, while the price of high yield credits rose 0.37% to around 84% of par. ABX market prices are higher (improving) by 0.49% of par or in absolute terms, 1.5%. Broadly speaking, CMBX market prices are lower by 0.73% of par or in absolute terms, 0.24% (not helped by GS writedowns and S&P downgrades). Volatility (VIX) is down -1.29pts to 25.02% (more dispersion trading pre OPEX?), with 10Y TSY selling off (yield rising) 11.1bps to 3.46% and the 2s10s curve steepened by 7.2bps (as PPI came in higher than expected), as the cost of protection on US Treasuries fell 2bps to 38bps. 2Y swap spreads widened 2.1bps to 44.38bps, as the TED Spread widened by 0.4bps to 0.34% and Libor-OIS deteriorated 0.3bps to 31.8bps.
The Dollar strengthened with DXY rising 0.05% to 80.166, Oil falling $0.25 to $59.44 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 0.96% today (a 0.37% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $5.05 to $925.35 as the S&P rallies (901.8 0.69%) outperforming IG credits (139bps 0.12%) while IG, which opened tighter at 141.75bps, underperforms HY credits. IG11 and XOver11 are -4.42bps and -25.75bps respectively while ITRX11 is -6bps to 116.75bps.
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 -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.
42% of IG credits are shifting by more than 3bps and 49% of the CDX universe are also shifting significantly (more than the 5 day average of 46%). The number of names wider than the index increased by 1 to 47 as the day's range fell to 4.75bps (one-week average 4.95bps), between low bid at 137.5 and high offer at 142.25 and higher beta credits (-0.94%) underperformed lower beta credits (-2.14%).
In IG, wideners were outpaced by tighteners by around 4-to-1, with only 17 credits notably wider. By sector, CONS saw 8% names wider, ENRGs 31% names wider, FINLs 24% names wider, INDUs 11% names wider, and TMTs 4% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 116.94bps and the latter at 122.39bps.
Cross Market, we are seeing the HY-XOver spread decompressing to 232.58bps from 219.61bps, but remains below the short-term average of 237.06bps, with the HY/XOver ratio rising to 1.31x, above its 5-day mean of 1.31x. The IG-Main spread decompressed to 22.25bps from 19.13bps, and remains above the short-term average of 21.34bps, with the IG/Main ratio rising to 1.19x, above its 5-day mean of 1.18x.
In the US, non-financials outperformed financials as IG ExFINLs are tighter by 2.2bps to 122.4bps, with 83 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 3.79bps to 154.02bps, with Finance names (worst) wider by 0.68bps to 813.48bps, Banks (best) tighter by 6bps to 204.76bps, and Brokers tighter by 3.13bps to 171.58bps. Monolines are trading wider on average by 9.63bps (0.87%) to 2866.2bps.
In IG, FINLs underperformed non-FINLs (0.68% wider to 1.79% tighter respectively), with the former (IG FINLs) wider by 2.5bps to 366.8bps, with 12 of the 21 names tighter. The IG CDS market (as per CDX) is 29.9bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (109.12bps), with the bond ETFs outperforming the IG CDS market by around 1.06bps.
In Europe, ITRX Main ex-FINLs (outperforming FINLs) rallied 6.5bps to 116.94bps (with ITRX FINLs -trading sideways- better by 4 to 116bps) and is currently trading tight to its week's range at 0%, between 126.69 to 116.94bps, and is trending tighter. Main LoVOL (sideways trading) is currently trading tight to its week's range at 0.04%, between 89.67 to 82.8bps. ExHVOL underperformed LoVOL as the differential decompressed to -5.7bps from -10.61bps, but remains below the short-term average of -3.59bps. The Main exFINLS to IG ExHVOL differential compressed to 39.83bps from 44.38bps, but remains above the short-term average of 39.1bps.
Commentary compliments of www.creditresearch.com
CDR LQD 50 NAIG091 -3.98bps to 172.82 (3 wider - 41 tighter <> 34 steeper - 14 flatter).
CDX12 IG -2.88bps to 139 ($0.12 to $98.37) (FV -1.51bps to 150.95) (17 wider - 95 tighter <> 73 steeper - 50 flatter) - Trend Tighter.
CDX12 HVOL -5.82bps to 335 (FV -0.02bps to 423.9) (7 wider - 21 tighter <> 17 steeper - 13 flatter) - Trend Wider.
CDX12 ExHVOL -1.95bps to 77.11 (FV -1.93bps to 87.69) (10 wider - 85 tighter <> 39 steeper - 56 flatter).
CDX11 XO -6.1bps to 376.5 (FV -5.75bps to 463.03) (5 wider - 24 tighter <> 18 steeper - 16 flatter) - No Trend.
CDX12 HY (30% recovery) Px $+0.37 to $84 / -12.8bps to 973.1 (FV -16.61bps to 911.3) (17 wider - 71 tighter <> 68 steeper - 26 flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $+0.45 to $84.55 / -21.27bps to 766.61 - Trend Tighter.
MCDX12 -7.5bps to 200bps. - Trend Tighter.
CDR Counterparty Risk Index fell 3.66bps (-2.32%) to 154.15bps (2 wider - 12 tighter).
CDR Government Risk Index fell 1.81bps (-2.85%) to 61.67bps..
DXY strengthened 0.05% to 80.17.
Oil fell $0.25 to $59.44.
Gold rose $5.05 to $925.35.
VIX fell 1.29pts to 25.02%.
10Y US Treasury yields rose 11.1bps to 3.46%.
S&P500 Futures gained 0.69% to 901.8.