Weekly Credit Summary: August 28
Credit underperformed equities this week as single-name tighteners edged wideners by four-to-three leaving indices (especially HY) underperforming intrinsics in general. CONSumer and ENRG names underperformed as TMT and FINLs were best with INDUstrials mixed. Financials outperformed non-financials but the strength in the former was more at the tails of the distribution while the weakness in the latter was more broad-based.
The go-go stock names such as AIG were among the best performers in IG with AIG and CIT near the top along with TXT, HIG, and ILFC). On the other end some sense of reality hit as the higher beta retailers widened with M, JCP, JWN, KSS, and KR the worst performers. Thank to the tail names, high beta credits managed to outperform on the week but the distribution is very wide as low beta names were on average wider by over 1%. ExHVOL was the worst performing index with a 4.5bps shift wider to over 70bps. HY skew widened notably on the week as we sense a lack of liquidity in single-names (and some protection selling on the overly hiked names such as FST and CHK) combined with flows into HY-IG decompression pulled HY away (rightly in our opinion).
IG12's index curve steepened as it widened while 5s7s intrinsics actually flattened/inverted further. HVOL index and intrinsics tracked each other closely this week, both falling (and outperforming) as we sense the 'closeness' of the higher beta retailers to the spread level of HVOL provides some clear evidence of why HVOL rallied (carry cover on the shorts).
IG saw on-the-runs underperforming off-the-runs with IG6-9 all significantly tighter as it appears the whole curve steepened up helped by the tail compression in AIG as much as anything else (where close maturities gapped tighter dramatically). HY was more mixed but tended to agree with IG11-12 underperforming HY6-9.
Over the week ABX and CMBX prices were higher on average by a smidge with CMBX outperforming as we note REITs tighter on the week but builders more mixed as low spread names underperformed wider names by quite a chunk.
Financials were mostly tighter on the week but not by much with SLM and ABK the exceptions and we note that MS and GS underperformed the rest of the majors. Insurers were more mixed.
The week's range was very low for both IG and HY (the lowest since the same week last year) but indices traded more regularly than gappy providing some reality for market watchers. HY-XOver decompressed over 30bps as we noted that LCDX-HY compressed 5bps on the week despite the last few days widening. HY-IG over XOver-Main continues to trend our way (+28bps this week) as we see XOver actually tighter on the week (but closed as equities were high this morning). Notably, given some of the technicals, we like looking at the HY-IG differential relative to stocks as a guide for relative performance and while the S&P managed a small gain, credit deteriorated notably even as TSY yields fell over 11bps (in 10Y) which tends to indicate the reach-for-yield corporate bond demand from a deflationary low-rate outlook which has been a driver is perhaps running out of steam.
Across all the asset classes, HY was one of the weakest while everything pretty much stuck there, gold up a smidge, oil down a buck, the dollar up a little, and VIX down a tad. The only other thing that had a decent nove was equity implied correlation which rose almost 3pts (which in the face of VIX contraction and equity flatness in notable). We said it in the dailies but the HY-IG and implied correlation moves provide us with some anxiety that sophisticated players are starting to try to position (subtly) for a break (down).
As a teaser for Monday's month end update, some stats from 7/31: SPX is +4.3%, VIX is -1.2pts, Dollar is a smidge weaker, Oil and Gold are up, and TSY yields are modestly lower...BUT...IG is over 5bps wider, HY is 56bps wider, ExHVOL is 13bps wider, wideners outpaced tighteners by almost five-to-one, CONS and TMT have significantly underperformed, the crazy distressed names (AIG/ILFC/CIT/TXT) provided dramatic help for IG and HVOL, the top 5 performers in IG provided around 8bps of tightening in the index while the bottom 40 performers widened IG by 8bps - if that tail hadn't compressed (helped by the squeeze in stocks) we would be significantly wider. Financial spreads have significantly (GS for example) underperformed Financial stocks as senior-subs have decompressed on the month.
Commentary compliments of www.creditresearch.com
CDR LQD 50 NAIG -1.16bps to 98.1 (23 wider - 25 tighter <> 22 steeper - 27 flatter).
CDX12 IG +1bps to 116 ($-0.02 to $99.34) (FV -1.73bps to 125.88) (61 wider - 58 tighter <> 68 steeper - 56 flatter) - No Trend.
CDX12 HVOL -9.38bps to 260 (FV -9.19bps to 314.5) (7 wider - 20 tighter <> 23 steeper - 7 flatter) - No Trend.
CDX12 ExHVOL +4.28bps to 70.53 (FV +0.46bps to 72.56) (54 wider - 41 tighter <> 50 steeper - 45 flatter).
CDX11 XO +2.3bps to 306.8 (FV +1.79bps to 350.3) (18 wider - 14 tighter <> 16 steeper - 18 flatter) - Trend Wider.
CDX12 HY (30% recovery) Px $-0.75 to $88.38 / +23.5bps to 828.5 (FV -19.89bps to 738.14) (26 wider - 63 tighter <> 49 steeper - 43 flatter) - Trend Wider.
LCDX12 (65% recovery) Px $-0.73 to $93.35 / +28.13bps to 726.94 - Trend Wider.
MCDX12 -17bps to 123bps. - Trend Tighter.
CDR Counterparty Risk Index fell 6.41bps (-5.21%) to 116.5bps (1 wider - 13 tighter).
CDR Government Risk Index fell 2.57bps (-5.63%) to 43.04bps..
DXY strengthened 0.32% to 78.3.
Oil fell $1.13 to $72.76.
Gold rose $1.85 to $955.7.
VIX fell 0.25pts to 24.76%.
10Y US Treasury yields fell 12bps to 3.45%.
S&P500 Futures gained 0.21% to 1027.4.
Spreads were mixed in the US with IG worse, HVOL improving, ExHVOL weaker, XO wider, and HY selling off. Indices typically underperformed single-names with skews mostly narrower as IG underperformed but narrowed the skew, HVOL outperformed but widened the skew, ExHVOL intrinsics beat and narrowed the skew, XO underperformed but compressed the skew, and HY's skew widened as it underperformed.
Only 8.8% of names in IG moved more than their historical vol would imply as higher vol names outperformed lower vol names by -0.56% to 1.93%. IG's vol is around 9.79% per one-week period, which leaves 98 names higher vol and 27 lower vol than the index.
The names having the largest impact on IG are American International Group, Inc. (-153.26bps) pushing IG 0.96bps tighter, and Macy's, Inc. (+21.52bps) adding 0.16bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 4.23bps tighter, and Macy's, Inc. contributing 0.7bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Viacom Inc. (-16bps) pushing the index 0.17bps tighter, and Constellation Energy Group Inc. (+19.69bps) adding 0.19bps to ExHVOL.
The price of investment grade credit fell 0.02% to around 99.34% of par, while the price of high yield credits fell 0.75% to around 88.38% of par. ABX market prices are higher (improving) by 0.09% of par or in absolute terms, 0.67%. Broadly speaking, CMBX market prices are higher (improving) by 1.52% of par or in absolute terms, 0.44%. Volatility (VIX) is down -0.25pts to 24.76%, with 10Y TSY rallying (yield falling) 12bps to 3.45% and the 2s10s curve flattened by 4.6bps, as the cost of protection on US Treasuries fell 1bps to 23bps. 2Y swap spreads tightened 7.6bps to 36.06bps, as the TED Spread tightened by 2.6bps to 0.21% and Libor-OIS improved 3.3bps to 17bps.
The Dollar strengthened with DXY rising 0.32% to 78.296, Oil falling $1.13 to $72.76 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 1.72% today (a 1.21% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $1.85 to $955.7 as the S&P rallies (1027.4 0.21%) outperforming IG credits (116bps -0.02%) while IG, which opened the week tighter at 112.5bps, outperformed HY credits. IG11 and XOver11 are +5.5bps and -6.82bps respectively while ITRX11 is -1.19bps to 91bps.
The majority of credit curves steepened 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 -6.3bps 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 decreasing more than expected this week indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads.
46% of IG credits are shifting by more than 3bps and 33% of the CDX universe are also shifting significantly (less than the 5 day average of 36%). The number of names wider than the index decreased by 1 to 44 as the week's range fell to 6.5bps (average over 10bps), between low bid at 111 and high offer at 117.5 and higher beta credits (-2.17%) outperformed lower beta credits (1.03%).
In IG, wideners outpaced tighteners by around 5-to-4, with 61 credits wider. By sector, CONS saw 81% names wider, ENRGs 56% names wider, FINLs 24% names wider, INDUs 54% names wider, and TMTs 9% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 92.23bps and the latter at 96.24bps.
Cross Market, we are seeing the HY-XOver spread decompressing to 231bps from 200.72bps, and remains above the short-term average of 215.53bps, with the HY/XOver ratio rising to 1.39x, above its 5-day mean of 1.36x. The IG-Main spread decompressed to 25bps from 22.81bps, and remains above the short-term average of 24.11bps, with the IG/Main ratio rising to 1.27x, above its 5-day mean of 1.27x.
In the US, non-financials underperformed financials as IG ExFINLs are tighter by 0bps to 96.2bps, with 44 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 6.41bps to 116.5bps, with Brokers (worst) tighter by 2.19bps to 145.26bps, Finance names (best) tighter by 15.88bps to 887.55bps, and Banks tighter by 3.71bps to 151.9bps. Monolines are trading wider on average by 182.9bps (0.84%) to 4056.46bps.
In IG, FINLs outperformed non-FINLs (3.63% tighter to 0.04% tighter respectively), with the former (IG FINLs) tighter by 10.6bps to 280.9bps, with 14 of the 21 names tighter. The IG CDS market (as per CDX) is 25.6bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (90.45bps), with the bond ETFs underperforming the IG CDS market by around 0.43bps.
In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 0.29bps to 92.23bps (with ITRX FINLs -trading sideways- better by 4.79 to 86.08bps) and is currently trading in the middle of the week's range at 67.64%, between 93.45 to 89.68bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading in the middle of the week's range at 42.68%, between 65.79 to 64.32bps. ExHVOL underperformed LoVOL as the differential decompressed to 5.58bps from 0.52bps, and remains above the short-term average of 3.08bps. The Main exFINLS to IG ExHVOL differential compressed to 21.7bps from 26.27bps, and remains below the short-term average of 23.71bps.
The Emerging Market index is 3.5% less risky (11.3bps tighter) to 310.4bps. EM10 (Trend Tighter) is currently trading tight to its week's range at -0.24%, between 321.7 to 310.4bps. The HY-EM spread decompressed to 518.13bps from 483.32bps, and remains above the short-term average of 495.08bps, with the HY/EM ratio rising to 2.67x, above its 5-day mean of 2.57x.
Within the 240 name CDX Index Universe, sentiment is more bullish, with 96 (42%) wideners to 126 (56%) tighteners and 124 (55%) steepeners to 106 (47%) flatteners (1.3 tighteners for every widener). Among this universe, there are 18 credits with a bullish trend, and 8 with a bearish trend (based on the previous five days trading action). The market's general sentiment is evident as we note that 41 credits are at the widest in their 5-day range currently, and 65 are at their tightest.
Notably, from the 240 name index universe, there are 128 (~53%) credits that have inverted curves, with an average inversion of 24% of 5Y CDS. Within the IG universe, dispersion overall has fallen -6.3bps to 255bps, as the wings of the distribution (10-90%) decreased less than the centre (25-75%) of the distribution. The distribution shifted non-linearly as the 10th percentile increased the most (1.3bps /4%) to 34.5bps, and the 90th percentile increased the least (-4.6bps /-1.88%) to 243bps.
IG Sector Moves and Betas
In IG, CONS (the worst sector) under-performed IG, moving (on average) 3.8bps (5.64%) wider to an average of 93.7bps. ENRG (the second weakest sector) under-performed IG, moving (on average) 2.2bps (1.32%) wider to an average of 107.2bps. INDU (the median sector) out-performed IG, moving (on average) 2.2bps (0.54%) tighter to an average of 105bps. FINL (the second best sector) out-performed IG, moving (on average) 12.2bps (2.14%) tighter to an average of 348.4bps. TMT (the best sector) out-performed IG, moving (on average) 5.2bps (7.47%) tighter to an average of 90.7bps.
From the top-down, index capital structure changes were divergent as equity beats credit. The sectors were mixed with CONS (divergent as equity beats credit), ENRG (both weaker with credit outperforming equity), FINL (improving with credit outpacing equity), INDU (divergent as credit beats equity), and TMT (improving with credit outpacing equity).
CDX-based regression betas indicate that FINL (1.98x) have the highest beta and CONS (0.72x) the lowest, with INDU (1.2x), TMT (0.86x), and ENRG (0.75x) in between. Comparing the regression betas to current level betas we see that INDU (0.38x rich) is the richest sector, while FINL (-1.28x cheap) is the cheapest, with TMT (0.31x rich), CONS (0.21x rich), and ENRG (0.1x rich) trading more in line.
Focusing on intra-sector movements within IG, we notice dispersion increasing the most in ENRG which shifted 4.89% to 74.6bps, and the least in INDU which shifted -6.72% to 99.8bps.
Index Relative-Value and Key Levels
Across index credit quality, we saw HVOL move against its trend wider relative to IG from a ratio of 2.31x to 2.24x, and HVOL also moved closer to IG and further from IG as it trades against its lack of trend now at 75.5% of the XO-IG difference, down from 77.6%. ExHVOL12 is currently trading at the wides of the week's range at 99.91%, between 70.53 to 66.25bps.HY shifted wider relative to IG, with its trend wider, now at 7.14x, up from 7.1x yesterday.
The HY-LCDX spread compressed to 101.57bps from 106.24bps, but remains above the short-term average of 91.2bps, with the HY/LCDX ratio falling to 1.14x, above its 5-day mean of 1.13x. The IG-MCDX differential decompressed to -7bps from -25bps, and remains above the short-term average of -14.94bps, with the IG/MCDX ratio rising to 0.94x, above its 5-day mean of 0.89x. The HY-IG differential decompressed to 712.5bps from 690.04bps, and remains above the short-term average of 694.67bps, with the HY/IG ratio rising to 7.14x, above its 5-day mean of 7.03x.
Both IG and HY are above (wider than) their opening levels of the week with HY's range of 70bps below the week's average range multiple of 9.2x IG's range, at 8.87x. HY12 is currently trading in the middle of the week's range at 71.74%, between 848.34 to 778.15bps. IG12 is currently trading in the middle of the week's range at 50%, between 121 to 111bps.
Our pivot point analysis suggests intraday support at 114.9bps in IG, and breaking support at 112.78bps or resistance at 116.78bps as significant, with the index trend undetermined (based on pivot point moving average changes), shifting tighter by 0.04bps per day over the last few days. On a short-term basis (based on the last 5 days trading), we see 114.88bps as a critical pivot point with 118.76bps, 124.88bps, and 131bps as important resistance levels, and 108.76bps, 104.88bps, and 98.76bps as important support levels. The short-term 'protection' relative strength indicator on IG moved from strongly oversold to stable at 64.3%.
Our pivot point analysis suggests intraday resistance at 812.02bps in HY, and breaking support at 812.27bps or resistance at 833.82bps as significant, with the index trend very bearish (based on pivot point moving average changes), shifting wider by 5.32bps per day over the last few days. On a short-term basis (based on the last 5 days trading), we see 813.6bps as a critical pivot point for HY with 849.05bps, 883.79bps, and 918.53bps as important resistance levels, and 778.86bps, 743.41bps, and 708.67bps as important support levels.On a short-term basis (based on the last 5 days trading), we see 813.6bps as a critical pivot point for HY with 849.05bps, 883.79bps, and 918.53bps as important resistance levels, and 778.86bps, 743.41bps, and 708.67bps as important support levels.
This week's biggest absolute movers in IG were Macy's, Inc. (+21.52bps), Constellation Energy Group Inc. (+19.69bps), and Pfizer Inc. (+15.33bps) in the wideners, and American International Group, Inc. (-153.26bps), Textron Financial Corp (-46.65bps), and Hartford Financial Services Group (-45bps) in the tighteners. This week's biggest percentage movers in IG were Pfizer Inc. (+44.86%), Autozone Inc. (+16.91%), and Kroger Co (+12.42%) in the wideners, and AT&T Mobility LLC (-26.07%), Dell Inc. (-20.13%), and American International Group, Inc. (-14.94%) in the tighteners.
In the more financial-heavy CDR NAIG LQD 50 index, sentiment is very bullish with 23 wider to 25 tighter, and 22 steeper to 27 flatter as 24 of the 50 credits have inverted curves. The biggest absolute movers were Nordstrom Inc. (+11.02bps), Autozone Inc. (+8.39bps), and Kohl's Corporation (+8.06bps) in the wideners, and HSBC Finance Corporation (-22.5bps), Dell Inc. (-15.25bps), and American Express Company (-11bps) in the tighteners. The biggest percentage movers in the CDR NAIG LQD 50 were VF Corporation (+20.1%), Autozone Inc. (+16.91%), and Kraft Foods Inc. (+12.27%) in the wideners, and Dell Inc. (-20.13%), Time Warner Inc. (-13.74%), and Cisco Systems Inc. (-13.12%) in the tighteners.
In XO11, this week's biggest percentage movers were Pulte Homes Inc (+17.09%), Sears Roebuck Acceptance Corp. (+8.88%), and KB Home (+7.46%) in the wideners, and Centex Corp (-20%), L-3 Communications Corp. (-10.16%), and Sun Microsystems Inc. (-6.67%) in the tighteners. The largest absolute movers in XO11 were Smithfield Foods Inc (+44.63bps), Sears Roebuck Acceptance Corp. (+28.42bps), and MGM Mirage Inc (+24.51bps) in the wideners, and Royal Caribbean Cruises Ltd (-27.83bps), Centex Corp (-20bps), and L-3 Communications Corp. (-19.79bps) in the tighteners.
In the names of the HY index, this week's biggest percentage movers were Fairfax Financial Holdings Limited (+36.66%), Iron Mountain Incorporated (+22.26%), and Limited Brands, Inc. (+8.46%) in the wideners, and Eastman Kodak Co. (-22.21%), Advanced Micro Devices Inc (-16.3%), and Louisiana-Pacific Corp (-14.36%) in the tighteners. The largest absolute movers in HY were Fairfax Financial Holdings Limited (+91.22bps), Iron Mountain Incorporated (+70.09bps), and AMR Corp (+61.32bps) in the wideners, and Eastman Kodak Co. (-381.18bps), Advanced Micro Devices Inc (-262.07bps), and Realogy Corporation (-202.75bps) in the tighteners.
The CDR Counterparty Risk Index Series 2 (of brokers and banks) fell -6.41bps (or -5.21%) to 116.5bps. Morgan Stanley (0bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Morgan Stanley (0%) is the worst (relative) performer. Royal Bank of Scotland Group Plc (-13.18bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and Barclays Bank Plc (-11.65%) is the best (relative) performer.
The CDR Aussie Index fell -7.95bps (or -7.07%) to 104.54bps. Crown Limited (1.6bps) is the worst (absolute) performer, whilst Crown Limited (1.31%) is the worst (relative) performer. Woodside Petroleum Limited (-20.88bps) is the best (absolute) performer
The CDR Asian Index fell -7.85bps (or -6.6%) to 111.02bps. IDBI Bank Limited (5.14bps) is the worst (absolute) performer, whilst Cathay Financial Holding Co Ltd (5.37%) is the worst (relative) performer. Promise Co Ltd (-78.15bps) is the best (absolute) performer, and Toyota Motor Corporation (-29.77%) is the best (relative) performer.