Weekly Credit Summary: July 17
Spreads were significantly tighter this week with HY dramatically outperforming IG as tighteners outpaced wideners by over twelve-to-one. LCDX appeared to be the long credit vehicle of choice though as investors moved into the most senior part of the capital structure systemically. High-beta underperformed low-beta names (in large part due to CIT's impact on the tail risk names) as we saw IG, HVOL, and ExHVOL indices considerably outperform intrinsics and widening the skew almost 10bps in IG12.
While IG12's curve was largely flat (moving tighter in parallel) this week, intrinsics flattened (inverted) considerably with 7Y the outperformer. This was in stark contracts ti the dramatic rise and steepening in TSY yields this week which seemed to go unnoticed by many as 30Y mortgage rates also rose 30bps this week (back above 4.5%). The CIT action kept series 9 index active and HVOL9 was a dramatic outperformer in the face of an 800bps rise in CIT (smells like correlation book hedging en masse) which helps to explain the skew performance on the week also.
Financials are significantly tighter on the week as earnings appeared astronomical. Interestingly, GS and MS underperformed the 'real' banks with BAC and JPM best performers. Builders had a huge week with stocks up over 17% (across the names that have active CDS) and spreads tighter on average 8%. The lower beta builders outperformed significantly in CDS land notably while the exact opposite was seen in stocks (e.g. HOV +15bps on the week but stock +32% - you decide!).
LCDX outperformed HY by around 60bps on the week with the latter seeing new contract highs over $85. Interestingly XOver11 outperformed HY12 this week and Main modestly outperformed IG as European financials underperformed US financials (with Subs breaking below 200bps in the former). We note that CDX and SPY have converged this week as our macro CSA trade has outperformed with the relationship getting close to fair now in the short-term (despite a significant drop in VIX during this OPEX week as OTM vols rose signficantly and the vol term structure steepened considerably).
Sovereign risk fell considerably this week as CDR's GRI dropped over 6bps (>10%) as we saw USA drop back to 35bps (near its tights) and European sovereigns helped by the news from AIG of the extension of the reg capital deals (European banks underperformed US banks on the week as systemic risk shifted back to the banks from the state modestly).
IG is holding at that recent 128bps swing tight but we reiterate the 118bps level as significant support on the tightening side and if investors are long then lightening into that level if we rally more makes more sense than momo following currently to us. HY-IG compressed almost 50bps this week back to around 800bps and we think has a decent risk-reward for decompression at these levels (3.5x ratio).
Commentary compliments of www.creditresearch.com
Index/Intrinsics Changes on the Week
CDR LQD 50 NAIG091 -15.09bps to 162.26 (1 wider - 48 tighter <> 35 steeper - 14 flatter).
CDX12 IG -14.25bps to 130.5 ($0.61 to $98.73) (FV -5.89bps to 154.19) (7 wider - 117 tighter <> 88 steeper - 37 flatter) - Trend Tighter.
CDX12 HVOL -10.06bps to 325 (FV +3.6bps to 421.85) (4 wider - 25 tighter <> 23 steeper - 7 flatter) - Trend Tighter.
CDX12 ExHVOL -15.57bps to 69.08 (FV -8.73bps to 81.15) (2 wider - 93 tighter <> 29 steeper - 66 flatter).
CDX11 XO -15.1bps to 365 (FV -24.19bps to 445.64) (1 wider - 33 tighter <> 23 steeper - 11 flatter) - Trend Tighter.
CDX12 HY (30% recovery) Px $+1.75 to $85.13 / -60.6bps to 936.5 (FV -66.04bps to 867.02) (10 wider - 84 tighter <> 75 steeper - 19 flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $+2.57 to $86.5 / -118.64bps to 696.99 - Trend Tighter.
MCDX12 -18bps to 190bps. - Trend Tighter.
CDR Counterparty Risk Index fell 16.62bps (-10.65%) to 139.41bps (0 wider - 14 tighter).
CDR Government Risk Index fell 6.37bps (-10.21%) to 56.07bps..
DXY weakened 0.89% to 79.52.
Oil rose $3.46 to $63.35.
Gold rose $24.23 to $937.28.
VIX fell 4.68pts to 24.34%.
10Y US Treasury yields rose 34.9bps to 3.66%.
S&P500 Futures gained 7.21% to 937.3.
Market Summary (from last Friday's close)
Spreads were tighter in the US this week as all the indices improved. 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 underperformed but compressed the skew, and HY's skew widened as it underperformed.
Only 32% of names in IG moved more than their historical vol would imply as higher vol names underperformed lower vol names by -7.75% to -10.83%. IG's vol is around 9.79% per week, which leaves 98 names higher vol and 27 lower vol than the index.
The names having the largest impact on IG are Dow Chemical Company (-47.17bps) pushing IG 0.36bps tighter, and CIT Group Inc (+757.22bps) adding 2.85bps to IG. HVOL is more sensitive with Dow Chemical Company pushing it 1.65bps tighter, and CIT Group Inc contributing 12.87bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Time Warner Cable Inc. (-44.5bps) pushing the index 0.46bps tighter, and National Rural Utilities Cooperative Finance Corporation (+37.59bps) adding 0.37bps to ExHVOL.
The price of investment grade credit rose 0.61% to around 98.73% of par, while the price of high yield credits rose 1.75% to around 85.13% of par. ABX market prices are higher (improving) by 0.8% of par or in absolute terms, 2.24%. Broadly speaking, CMBX market prices are higher (improving) by 0.03% of par or in absolute terms, 0.01%. Volatility (VIX) is down 4.68pts to 24.34%, with 10Y TSY selling off (yield rising) 34.9bps to 3.66% and the 2s10s curve steepened by 26.2bps, as the cost of protection on US Treasuries fell 5bps to 35bps. 2Y swap spreads widened 8.5bps to 47.5bps, as the TED Spread widened by 0.4bps to 0.34% and Libor-OIS deteriorated 0.3bps to 31.4bps.
The Dollar weakened with DXY falling 0.89% to 79.517, Oil rising $3.46 to $63.35 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 3.04% today (a 4.89% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $24.23 to $937.28 as the S&P rallies (937.3 7.21%) outperforming IG credits (130.5bps 0.62%) while IG, which opened tighter at 130.5bps, underperforms HY credits. IG11 and XOver11 are -4.75bps and -72.96bps respectively while ITRX11 is -16.45bps to 107.25bps.
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 rose +59.2bps 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 this week indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.
89% of IG credits are shifting by more than 3bps and 51% of the CDX universe are also shifting significantly (less than the 5 day average of 51%). The number of names wider than the index decreased by 5 to 42 as the week's range fell to 20bps (one-month average 26bps), between low bid at 128.5 and high offer at 148.5 and higher beta credits (-5.45%) underperformed lower beta credits (-9.87%).
In IG, wideners were dramatically outpaced by tighteners by around 14-to-1, with only 7 credits notably wider. By sector, CONS saw 0% names wider, ENRGs 6% names wider, FINLs 14% names wider, INDUs 11% names wider, and TMTs 0% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 107.63bps and the latter at 114.38bps.
Cross Market, we are seeing the HY-XOver spread decompressing to 235.46bps from 223.06bps, and remains above the short-term average of 225.73bps, with the HY/XOver ratio rising to 1.34x, above its 5-day mean of 1.31x. The IG-Main spread decompressed to 23.25bps from 21.05bps, but remains above the short-term average of 20.3bps, with the IG/Main ratio rising to 1.22x, above its 5-day mean of 1.18x.
In the US, non-financials underperformed financials as IG ExFINLs are tighter by 10.8bps to 114.4bps, with 100 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 16.62bps to 139.41bps, with Finance names (worst) wider by 134.08bps to 914.94bps, Banks (best) tighter by 29.18bps to 183.26bps, and Brokers tighter by 24.06bps to 152.51bps. Monolines are trading tighter on average by -66.66bps (1.55%) to 2857.5bps.
In IG, FINLs (ex CIT) outperformed non-FINLs (11% tighter to 8.63% tighter respectively), with the former (IG FINLs) wider by 20.5bps to 367.8bps, with 17 of the 21 names tighter. The IG CDS market (as per CDX) is 31.4bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (99.14bps), with the bond ETFs outperforming the IG CDS market by around 5.78bps.
In Europe, ITRX Main ex-FINLs (outperforming FINLs) rallied 17.62bps to 107.63bps (with ITRX FINLs -trending tighter- better by 11.75 to 105.75bps) and is currently trading tight to its week's range at 0%, between 125.25 to 107.63bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at 0.01%, between 89.67 to 76.38bps. ExHVOL outperformed LoVOL as the differential compressed to -7.3bps from -4.87bps, but remains above the short-term average of -8.62bps. The Main exFINLS to IG ExHVOL differential compressed to 38.55bps from 40.6bps, but remains below the short-term average of 41.92bps.
The Emerging Market index is 6.2% less risky (25.7bps tighter) to 389.2bps. EM10 (Trend Tighter) is currently trading tight to its week's range at 0.16%, between 414.9 to 389.2bps. The HY-EM spread compressed to 547.22bps from 582.12bps, and remains below the short-term average of 562.91bps, with the HY/EM ratio rising to 2.41x, below its 5-day mean of 2.41x.
IG Sector Moves and Betas
In IG, FINL (the worst sector - including CIT) under-performed IG, moving (on average) 43.2bps (1.91%) wider to an average of 464.6bps. ENRG (the second weakest sector) under-performed IG, moving (on average) 8.3bps (7.82%) tighter to an average of 109.5bps. INDU (the median sector) under-performed IG, moving (on average) 8.4bps (7.91%) tighter to an average of 147.3bps. CONS (the second best sector) under-performed IG, moving (on average) 10.4bps (9.65%) tighter to an average of 100.5bps. TMT (the best sector) out-performed IG, moving (on average) 16.5bps (13.33%) tighter to an average of 115.7bps.
From the top-down, index capital structure changes improved with credit outpacing equity. The sectors were mixed with CONS (improving with credit outpacing equity), ENRG (improving with credit outpacing equity), FINL (equity outperformed credit as they both strengthened), INDU (equity outperformed credit as they both strengthened), 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 (0.32x rich) is the richest sector, while FINL (-1.5x cheap) is the cheapest, with CONS (0.31x rich), TMT (0.3x rich), and ENRG (0.26x rich) trading more in line.
Focusing on intra-sector movements within IG, we notice dispersion increasing the most in FINL which shifted 29.48% to 668.5bps, and the least in CONS which shifted -8.87% to 82.9bps.
Our pivot point analysis suggests intraday resistance at 134.54bps in IG, and breaking support at 124.23bps or resistance at 132.23bps as significant, with the index trend very bullish (based on pivot point moving average changes), shifting tighter by 3.41bps per day over the last few days. On a short-term basis (based on the last 5 days trading), we see 134.5bps as a critical pivot point with 140bps, 153.5bps, and 167bps as important resistance levels, and 121bps, 115.5bps, and 102bps as important support levels. The short-term 'protection' relative strength indicator on IG moved even more oversold at 0%.
Our pivot point analysis suggests intraday resistance at 951.96bps in HY, and breaking support at 892.4bps or resistance at 952.48bps as significant, with the index trend very bullish (based on pivot point moving average changes), shifting tighter by 15.98bps per day over the last few days. On a short-term basis (based on the last 5 days trading), we see 953.34bps as a critical pivot point for HY with 999.4bps, 1065.3bps, and 1131.2bps as important resistance levels, and 887.44bps, 841.38bps, and 775.48bps as important support levels.On a short-term basis (based on the last 5 days trading), we see 953.34bps as a critical pivot point for HY with 999.4bps, 1065.3bps, and 1131.2bps as important resistance levels, and 887.44bps, 841.38bps, and 775.48bps as important support levels.
Single-Name Movers (weekly changes)
This week's biggest absolute movers in IG were CIT Group Inc (+757.22bps), International Lease Finance Corp. (+409.7bps), and Textron Financial Corp (+84.3bps) in the wideners, and Dow Chemical Company (-47.17bps), Time Warner Cable Inc. (-44.5bps), and Alcoa Inc. (-42.52bps) in the tighteners. The week's biggest percentage movers in IG were International Lease Finance Corp. (+44.67%), CIT Group Inc (+37.41%), and National Rural Utilities Cooperative Finance Corporation (+16.9%) in the wideners, and Kraft Foods Inc. (-26.51%), Time Warner Cable Inc. (-25.07%), and FirstEnergy Corp (-21.9%) in the tighteners.
In the more financial-heavy CDR NAIG LQD 50 index, sentiment is bullish with 1 wider to 48 tighter, and 35 steeper to 14 flatter as 38 of the 50 credits have inverted curves. The biggest absolute movers were National Rural Utilities Cooperative Finance Corporation (+40.59bps), Wachovia Corp. (0bps), and Devon Energy Corporation (-1.5bps) in the wideners, and Citigroup Inc (-50bps), Merrill Lynch & Co., Inc. (-43.75bps), and Bank of America Corp. (-42.23bps) in the tighteners. The biggest percentage movers in the CDR NAIG LQD 50 were National Rural Utilities Cooperative Finance Corporation (+18.25%), Wachovia Corp. (0%), and Financial Security Assurance Inc. (-1.92%) in the wideners, and Kraft Foods Inc. (-26.51%), JP Morgan Chase & Co. (-21.89%), and Bank of America Corp. (-20.38%) in the tighteners.
In XO11, this week's biggest percentage movers were Bombardier Inc. (+1.25%), Chemtura Corporation (0%), and EL Paso Corp (-0.86%) in the wideners, and CA, Inc. (-16.92%), Flextronics International Ltd. (-16.65%), and Temple-Inland Inc. (-12.73%) in the tighteners. The largest absolute movers in XO11 were Bombardier Inc. (+8.83bps), Chemtura Corporation (0bps), and Gap Inc (-2.79bps) in the wideners, and Belo Corp (-118.35bps), Flextronics International Ltd. (-112.06bps), and Smithfield Foods Inc (-75.53bps) in the tighteners.
In the names of the HY index, this week's biggest percentage movers were Radian Group Inc (+7.52%), Lear Corp (+4.1%), and Realogy Corporation (+2.65%) in the wideners, and Gannett Co., Inc. (-26.26%), ArvinMeritor Inc (-20.4%), and Level 3 Communications Inc. (-19.52%) in the tighteners. The largest absolute movers in HY were Lear Corp (+143.34bps), Radian Group Inc (+119.78bps), and Realogy Corporation (+109.1bps) in the wideners, and AMR Corp (-845.91bps), American Axle & Manufacturing Inc (-416.09bps), and ArvinMeritor Inc (-413.04bps) in the tighteners.
The CDR Counterparty Risk Index Series 2 (of brokers and banks) fell -16.48bps (or -10.56%) to 139.54bps. Deutsche Bank AG (-0.38bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Deutsche Bank AG (-0.32%) is the worst (relative) performer. Citigroup Inc (-50bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and JP Morgan Chase & Co. (-21.89%) is the best (relative) performer.
The CDR Aussie Index fell -8.05bps (or -5.33%) to 142.77bps. Lend Lease Corporation Limited (16.45bps) is the worst (absolute) performer, whilst Lend Lease Corporation Limited (5.2%) is the worst (relative) performer. BHP Billiton Ltd (-24.58bps) is the best (absolute) performer, and BHP Billiton Ltd (-18.57%) is the best (relative) performer.
The CDR Asian Index rose 40.66bps (or 10.66%) to 422.16bps. Takefuji Corp (1556.09bps) is the worst (absolute) performer, whilst Takefuji Corp (53.83%) is the worst (relative) performer. Tata Motors Ltd. (-146.7bps) is the best (absolute) performer, and Tata Motors Ltd. (-14.91%) is the best (relative) performer.