Weekly Credit Summary: August 7
Spreads were mostly tighter this week with ExHVOL the only index that widened (thanks to HVOL's significant outperformance) as HY outperformed IG (While corporates were mostly tighter, Major Sovereign CDS were notably weaker on the week). Indices typically underperformed single-names (but intrinsics had been leading indices tighter all week) with skews mostly narrower as IG underperformed but narrowed the skew, HVOL underperformed but narrowed the skew, ExHVOL's skew widened as it underperformed, XO underperformed but compressed the skew, and HY's skew widened as it underperformed.
[Watch HY-IG, XOver-Main, HY-LCDX, Main ExFINLs-Main FINLs, and ExHVOL as they all broke significant levels this week. Senior-Sub FINLs decompresed on the week (often leads senior weakness). Also curves and rolls are lagging outright spread performance as IG9 underperformed IG12 but the very short-end outperformed thanks to CIT/AIG/MBI strength.]
The names having the largest impact on IG are American International Group, Inc. (-504.68bps) pushing IG 3.03bps tighter , and Valero Energy Corp. (+35bps) adding 0.26bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 13.3bps tighter, and Masco Corp. contributing -0.13bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both CenturyTel Inc (-15bps) pushing the index 0.16bps tighter, and Valero Energy Corp. (+35bps) adding 0.34bps to ExHVOL.
The price of investment grade credit rose 0.26% to around 99.8% of par, while the price of high yield credits rose 1.19% to around 91.38% of par. ABX market prices are lower by 0.55% of par or in absolute terms, 2.05%. Broadly speaking, CMBX market prices are higher (improving) by 1.05% of par or in absolute terms, 0.22%. Volatility (VIX) is down -1.16pts to 24.76%, with 10Y TSY selling off (yield rising) 37.5bps to 3.86% and the 2s10s curve steepened by 18.8bps, as the cost of protection on US Treasuries rose 0bps to 27bps. 2Y swap spreads widened 10bps to 45.25bps, as the TED Spread tightened by 1.3bps to 0.29% and Libor-OIS improved 1.2bps to 26.6bps.
The Dollar strengthened with DXY rising 0.76% to 78.945, Oil rising $1.19 to $70.64 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 1.6% today (a 2.47% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $1.1 to $955.1 as the S&P rallies (1006.4 2.23%) outperforming IG credits (104.88bps 0.26%) while IG, which opened the week wider at 109.5bps, underperforms HY credits. IG11 and XOver11 are -6bps and -31.08bps respectively while ITRX11 is -1.43bps to 86.75bps.
Dispersion fell 44.3bps 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 increasing more than expected this week indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.
71% 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 39 as the week's range fell to only 10bps (one-month average 14.7bps), between low bid at 104 and high offer at 114.5 and higher beta credits (-10.82%) outperformed lower beta credits (-6.69%).
In IG, wideners were outpaced by tighteners by around 8-to-1, with only 12 credits notably wider. By sector, CONS saw 14% names wider, ENRGs 19% names wider, FINLs 0% names wider, INDUs 14% names wider, and TMTs 0% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 87.31bps and the latter at 78.47bps.
Cross Market , we are seeing the HY-XOver spread compressing to 156.18bps from 161.25bps, but remains above the short-term average of 155.73bps, with the HY/XOver ratio rising to 1.27x, above its 5-day mean of 1.26x. The IG-Main spread compressed to 18.13bps from 22.58bps, and remains below the short-term average of 20.76bps, with the IG/Main ratio falling to 1.21x, below its 5-day mean of 1.23x.
In the US, non-financials outperformed financials as IG ExFINLs are tighter by 6.8bps to 78.5bps, with 91 of the 104 names tighter, while among US Financials, the CDR Counterparty Risk Index fell 1.14bps to 107.36bps, with Brokers (worst) tighter by 3.56bps to 124.2bps, Banks (best) tighter by 11.11bps to 141.19bps, and Finance names tighter by 71.68bps to 893.66bps. Monolines are trading tighter on average by -293.24bps (11.43%) to 3489.69bps.
In IG12, FINLs (thanks mainly to the junky rally in CIT/AIG as it does not include the majors) outperformed non-FINLs (15.97% tighter to 8.01% tighter respectively), with the former (IG FINLs) tighter by 51.6bps to 271.4bps, with 21 of the 21 names tighter. The IG CDS market (as per CDX) is 30.4bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (74.49bps), with the bond ETFs outperforming the IG CDS market by around 4.3bps.
In Europe, ITRX Main ex-FINLs (outperforming FINLs) rallied 2.79bps to 87.31bps (with ITRX FINLs -trading sideways- weaker by 4 to 84.5bps) and is currently trading tight to its week's range at 0%, between 92.47 to 87.31bps, and is trending tighter. Main LoVOL (sideways trading) is currently trading tight to its week's range at 0.01%, between 69.16 to 63.46bps. ExHVOL underperformed LoVOL as the differential decompressed to -2.83bps from -7.71bps, but remains above the short-term average of -7.75bps. The Main exFINLS to IG ExHVOL differential compressed to 26.68bps from 32.68bps, and remains below the short-term average of 31.7bps.
The Emerging Market index is 9.5% less risky (30.5bps tighter) to 291.4bps. EM10 (No Trend) is currently trading tight to its week's range at -0.02%, between 321.9 to 291.4bps. The HY-EM spread compressed to 448.04bps from 453.66bps, but remains below the short-term average of 455.09bps, with the HY/EM ratio rising to 2.54x, above its 5-day mean of 2.52x.
Commentary provided by www.creditresearch.com
Index/Intrinsics Changes (Friday-to-Friday changes)
CDR LQD 50 NAIG091 -13.04bps to 120.61 (6 wider - 42 tighter <> 29 steeper - 19 flatter).
CDX12 IG -5.88bps to 104.88 ($0.26 to $99.8) (FV -13.99bps to 109.32) (12 wider - 112 tighter <> 69 steeper - 56 flatter) - Trend Tighter.
CDX12 HVOL -34.66bps to 245 (FV -49.95bps to 286.31) (0 wider - 30 tighter <> 19 steeper - 11 flatter) - Trend Tighter.
CDX12 ExHVOL +3.21bps to 60.63 (FV -3.37bps to 59.02) (12 wider - 83 tighter <> 45 steeper - 50 flatter).
CDX11 XO -17.2bps to 284.4 (FV -19.11bps to 305.54) (2 wider - 32 tighter <> 23 steeper - 11 flatter) - Trend Tighter.
CDX12 HY (30% recovery) Px $+1.19 to $91.38 / -36.1bps to 739.4 (FV -55.35bps to 686.56) (14 wider - 78 tighter <> 69 steeper - 23 flatter) - No Trend.
LCDX12 (65% recovery) Px $+2.65 to $93.6 / +101.47bps to 628.52 - Trend Tighter.
MCDX12 -11bps to 146bps. - Trend Tighter.
CDR Counterparty Risk Index fell 1.14bps (-1.05%) to 107.36bps (9 wider - 5 tighter).
CDR Government Risk Index rose 2.23bps (5.5%) to 42.86bps..
DXY strengthened 0.76% to 78.95.
Oil rose $1.19 to $70.64.
Gold rose $1.1 to $955.1.
VIX fell 1.16pts to 24.76%.
10Y US Treasury yields rose 37.5bps to 3.86%.
S&P500 Futures gained 2.23% to 1006.4.
Within the 240 name CDX Index Universe, sentiment is more bullish, with only 27 (12%) wideners to 203 (88%) tighteners and 148 (64%) steepeners to 83 (36%) flatteners (7.5 tighteners for every widener). Among this universe, there are 36 credits with a bullish trend, and 1 with a bearish trend (based on the previous five days trading action). The market's general sentiment is evident as we note that 18 credits are at the widest in their 5-day range currently, and 120 are at their tightest.
Within the IG universe, dispersion overall has fallen -44.3bps to 256.8bps, 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 50th percentile increased the most (-0.3bps /-0.5%) to 63.5bps, and the 90th percentile increased the least (-26.3bps /-11.06%) to 211.5bps.
IG Sector Moves and Betas
In IG, ENRG (the worst sector) under-performed IG, moving (on average) 1.3bps (4.32%) tighter to an average of 91.6bps. INDU (the second weakest sector) out-performed IG, moving (on average) 9.6bps (6.49%) tighter to an average of 90.3bps. CONS (the median sector) out-performed IG, moving (on average) 5.5bps (6.55%) tighter to an average of 73.7bps. TMT (the second best sector) out-performed IG, moving (on average) 10bps (11.14%) tighter to an average of 69bps. FINL (the best sector) out-performed IG, moving (on average) 63.7bps (12.19%) tighter to an average of 341.4bps.
From the top-down, index capital structure changes shifted positively with credit outpacing equity. The sectors were mixed with CONS (improving with credit outpacing equity), ENRG (divergent as credit beats equity), FINL (improving with credit outpacing equity), INDU (improving with credit outpacing equity), and TMT (divergent as credit beats 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 (0.4x rich) is the richest sector, while FINL (-1.52x cheap) is the cheapest, with TMT (0.4x rich), CONS (0.27x rich), and ENRG (0.11x rich) trading more in line.
Focusing on intra-sector movements within IG, we notice dispersion increasing the most in ENRG which shifted 9.68% to 70.3bps, and the least in TMT which shifted -17.16% to 55.1bps.
Index Relative-Value and Key Levels
Across index credit quality, we saw HVOL move with its trend tighter relative to IG from a ratio of 2.41x to 2.33x, and HVOL also moved closer to IG and further from IG as it trades against its lack of trend now at 78.3% of the XO-IG difference, down from 88%. ExHVOL12 is currently trading at the wides of the week's range at 91.49%, between 61.05 to 57.37bps.HY shifted wider relative to IG, with its trend wider, now at 7.05x, up from 6.86x yesterday. The HY-LCDX spread decompressed to 112.72bps from 48.16bps, and remains above the short-term average of 82.54bps, with the HY/LCDX ratio rising to 1.18x, above its 5-day mean of 1.12x. The IG-MCDX differential decompressed to -40.04bps from -46.24bps, but remains above the short-term average of -47.63bps, with the IG/MCDX ratio rising to 0.72x, above its 5-day mean of 0.7x. The HY-IG differential compressed to 634.66bps from 664.82bps, and remains below the short-term average of 644.07bps, with the HY/IG ratio rising to 7.05x, above its 5-day mean of 6.84x.
Both IG and HY are below (tighter than) their opening levels today with HY's range of 32.04bps below the week's average range multiple of 7.54x IG's range, at 4.01x. HY12 is currently trading tight to its week's range at 14.45%, between 794.94 to 730.28bps. IG12 is currently trading tight to its week's range at 9.14%, between 114.5 to 104bps.
Our pivot point analysis suggests intraday resistance at 111.65bps in IG, and breaking support at 107.99bps or resistance at 112.24bps as significant, with the index trend bullish (based on pivot point moving average changes), shifting tighter by 0.47bps per day over the last few days. On a short-term basis (based on the last 5 days trading), we see 110.81bps as a critical pivot point with 113.37bps, 117.06bps, and 120.75bps as important resistance levels, and 107.12bps, 104.56bps, and 100.87bps as important support levels. The short-term 'protection' relative strength indicator on IG moved even more oversold at 21.8%.
Our pivot point analysis suggests intraday support at 755.93bps in HY, and breaking support at 735.97bps or resistance at 770.21bps as significant, with the index trend bullish (based on pivot point moving average changes), shifting tighter by 0.62bps per day over the last few days. On a short-term basis (based on the last 5 days trading), we see 759.01bps as a critical pivot point for HY with 785.93bps, 821.86bps, and 857.79bps as important resistance levels, and 723.08bps, 696.16bps, and 660.23bps as important support levels.On a short-term basis (based on the last 5 days trading), we see 759.01bps as a critical pivot point for HY with 785.93bps, 821.86bps, and 857.79bps as important resistance levels, and 723.08bps, 696.16bps, and 660.23bps as important support levels.
This week's biggest absolute movers in IG were Valero Energy Corp. (+35bps), Constellation Energy Group Inc. (+18.02bps), and Transocean Ltd. (+10.75bps) in the wideners, and American International Group, Inc. (-504.68bps), CIT Group Inc (-285.15bps), and International Lease Finance Corp. (-171.66bps) in the tighteners. This week's biggest percentage movers in IG were Valero Energy Corp. (+14.43%), Transocean Ltd. (+14.33%), and Constellation Energy Group Inc. (+12.92%) in the wideners, and American International Group, Inc. (-33.62%), CenturyTel Inc (-24%), and CBS Corporation (-20.93%) in the tighteners.
In the more financial-heavy CDR NAIG LQD 50 index, sentiment is mixed with 6 wider to 42 tighter, and 29 steeper to 19 flatter as 35 of the 50 credits have inverted curves. The biggest absolute movers were Valero Energy Corp. (+35bps), Constellation Energy Group Inc. (+18.02bps), and Transocean Ltd. (+10.75bps) in the wideners, and Financial Security Assurance Inc. (-294.69bps), HSBC Finance Corporation (-82.5bps), and RR Donnelley & Sons Company (-45bps) in the tighteners. The biggest percentage movers in the CDR NAIG LQD 50 were Valero Energy Corp. (+14.43%), Transocean Ltd. (+14.33%), and Constellation Energy Group Inc. (+12.92%) in the wideners, and Financial Security Assurance Inc. (-24.46%), HSBC Finance Corporation (-23.24%), and Wal-Mart Stores Inc. (-18.38%) in the tighteners.
In XO11, the week's biggest percentage movers were Boston Scientific Corp. (+4.36%), Temple-Inland Inc. (+1.25%), and Windstream Corporation (-0.87%) in the wideners, and Sun Microsystems Inc. (-28.57%), Bombardier Inc. (-18.39%), and Gap Inc (-16.67%) in the tighteners. The largest absolute movers in XO11 were Boston Scientific Corp. (+3.26bps), Temple-Inland Inc. (+2bps), and MeadWestvaco Corporation (-1.54bps) in the wideners, and Bombardier Inc. (-102.51bps), Liz Claiborne Inc. (-86.88bps), and MGM Mirage Inc (-54.93bps) in the tighteners.
In the names of the HY index, this week's biggest percentage movers were Tesoro Corporation (+5.39%), Standard-Pacific Corp (+3.96%), and AMR Corp (+2.81%) in the wideners, and American Axle & Manufacturing Inc (-56.91%), Domtar Corporation (-29.55%), and DirecTV Holdings LLC (-26.55%) in the tighteners. The largest absolute movers in HY were AMR Corp (+176.24bps), Radian Group Inc (+36.43bps), and Standard-Pacific Corp (+27.82bps) in the wideners, and American Axle & Manufacturing Inc (-3151.61bps), Realogy Corporation (-496.1bps), and Ford Motor Company (-218.01bps) in the tighteners.
The CDR Counterparty Risk Index Series 2 (of brokers and banks) fell -1.14bps (or -1.05%) to 107.36bps. Royal Bank of Scotland Group Plc (7.5bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Deutsche Bank AG (7.74%) is the worst (relative) performer. Citigroup Inc (-43.75bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and Citigroup Inc (-15.28%) is the best (relative) performer.
The CDR Aussie Index rose 4.59bps (or 4.31%) to 111.1bps. Lend Lease Corporation Limited (16.45bps) is the worst (absolute) performer, whilst Woolworths Limited (15.47%) is the worst (relative) performer. RIO Tinto Ltd (-7.1bps) is the best (absolute) performer, and RIO Tinto Ltd (-4.82%) is the best (relative) performer.
The CDR Asian Index rose 4.62bps (or 1.32%) to 353.55bps. Takefuji Corp (681bps) is the worst (absolute) performer, whilst Petroliam Nasional Berhad (21.69%) is the worst (relative) performer. Tata Motors Ltd. (-88bps) is the best (absolute) performer, and Toshiba Corporation (-32.45%) is the best (relative) performer.