Guest Post: Stocks Up.... So Is Risk Aversion
Submitted by Credit Trader
Stocks Up BUT Risk Aversion Up
S&P Futures managed to test the Jan 11th highs but risk aversion in credit remains significantly shifted since then which we find intriguing. VIX is slightly higher than at 1/11, 10Y TSY 10bps lower in yield with a notable duration extension into the 5-7Y region of the curve and away from 2Y and 30Y, DXY is up 4.5% but oil is a smidge lower while Gold is -$44. All of these changes as equities reach 2010 highs once again. It is the credit shifts that we find the most notable in the last 42 workdays.
IG is 7bps wider than at 1/11 (with IG intrinsics 13bps wider!). HY is 43bps wider (and intrinsics 39bps) from the closing level on 1/11. Main and ITRX are also notably wider today (9bps and 25bps respectively). In single-names, wideners outpaced tighteners by a huge 6-to-1 and while FINLs outperformed non-FINLs handily in IG names, the majors have seen dramatic curve flattening in that period as well as decompression (remember IG13 has AIG/ILFC and none of the major banks).
As an example, CDR's Counterparty Risk Index (CRI), which tracks 14 of the largest derivative market makers in the world, has seen a 19bps and 22bps widening in 5Y and 3Y spreads (so an absolute flattening) whch would imply a dramatic rise in forward credit risk premia (think about how much additional interest expense will be drag n bank EPS as TLGP is rolled). However this represents a 35% shift in 3Y risk and 23% shift in 5Y risk with BAC, C, BARC, and RBS flattening the most. ITRX Sen-Sub has decompressed 9bps since 1/11 as ITRX Main ExFINLs has outperformed FINLs by 7bps.
This, perhaps could be explained by sovereign risk, but SovX is actually 3bps tighter today than at 1/11 (4.5% less risky) and while Greece remains 23bps wider than at 1/11, most sovereigns are tighter (except Dubai +55bps). ITRX FINLs underperformed SovX by 17bps since 1/11 (and ITRX exFINLs underperformed by 10bps).
So what? Well the so what is that equities are now back at the highs (seemingly ebullient) but credit remains notably more risk averse (even with the dramatic new issue supply we have had) as it appears that the systemic threat of a sovereign crisis (though now rescinded from sovereign spreads) have left a permanent mark in FINLs and non-FINL corporates. This is interesting as the flattening of the term structures in FINLs and IG (and in 3s5s HY) along with this systemically wider risk premium in credit over equity appears to imply much less satisfaction in fixed income markets than in equity markets.
While a discussion of the fixed income flow vs equity flows and Boomer retirement/dis-saving arguments is a topic for another time, the lack of volume in equity as we raced back up to the 1/11 highs seems to suggest a lack of buy-in that is confirmed by the credit markets inability to reach those swing tights. While technicians will be looking for breakouts, we humbly suggest a more underweight equity vs credit position in the short-term and keeping a close-eye on relative performance (especially given IG13's outperformance of intrinsics since 1/11).