Commentary conributed by www.creditresearch.com
Spreads were significantly wider this week with HY the notable underperformer relative to IG. Indices underperformed intrinsics in general as US credit worsened relative to European credit quite drastically. US corporate bonds (cash) saw a definite up-in-quality shift as TSYs rallied large and flattened 10bps or so. FINLs (most critically the majors) outperformed non-FINLs on the week as real economy risks start to be the focus once again with 10-12bps compression in the spread between them in the EUR and 5-6bps in the US.
Stocks were the worst performers on a beta-adjusted basis relative to IG and HY in the US as EUR seemed to lose it status as worst of a bad bunch for a week as SovX and FINLs managed decent gains on the week. It seems our view of the credit market anticipating a turn in the cycle was correct and the consumer-sensitive sectors have seen equity play catch up to credit's warning signs from MAY. Many sectors are getting closer to fair across the capital structure but Leisure, Energy, Telecoms, and Consumer NonCyclicals still have room to drop in equities relative to credit's perception of risk. Tech, if anything, looks a little overdone in its sell-off in equities but this is perhaps due to less liquid credit and more highly levered Tech plays in stocks.
Enough has been written on the weak macro data this week and growing feeling of deflationary scenarios and it seems the reality of that is playing out as IG bonds were only marginally wider (though CDS were more so) as HY bonds lost significant ground (around 30bps on all TRACE bonds).
The underperformance of CDS indices relative to IG and HY bonds this week is worth noting as perhaps we are seeing another leg in macro-overlays (that were last more generally overlaid in APR/MAY) as fund flows and economic perception perhaps leave investors even more concerned at unwinding their real money positions into a market with no buyers (certainly bond trading volumes were well below average as bids could not find offers even with it being a holiday week).
The strength in SovX is notable especially relative to CEEMEA, Asian SovX, and most of all EM sovereigns as the latter was 20bps or around 8% wider. We remind clients of the EM vs Oil vs SovX relationship that we have pointed out before and this week's drop in oil prices (and gold more so) in the face of DXY weakness is certainly seemingly more a global growth story than FX arbs. Major unwinds in carry pairs were evident and we would be concerned that while a lot of attention has been paid to the surplus nations of oil-exporting or commodity rich as safe-havens from sovereign risk, the leverage to oil/commodities is frighteningly real and transmission mechanisms all too fast nowadays.
FINLs underperformed non-FINLs as INDustrials and TMT underperformed and ENRG outperformed as Utes saw a safety bid. Notably, FINLs weakness was more driven by insurers and monolines than the majors. Breadth was hugely negative at around 15-to-1 with dispersion rising notably. Seems the single-name discrimination against index overlay unwinds is happening apace - be careful watching indices alone for indications of risk appetite - skews and basis are extremely volatile currently.
Index/Intrinsics Changes (Friday-to-Friday)
CDR LQD 50 NAIG +5.32bps to 110.79 (50 wider - 0 tighter <> 23 steeper - 27 flatter).
CDR Counterparty Risk Index fell 2.09bps (-1.31%) to 158.25bps (6 wider - 8 tighter).
CDR Government Risk Index fell 5.92bps (-5.17%) to 108.64bps..
CDX14 IG +9.25bps to 123 ($-0.38 to $99.01) (FV +5.43bps to 129.53) (112 wider - 10 tighter <> 53 steeper - 72 flatter) - Trend Wider.
CDX14 HVOL +0.5bps to 180 (FV +11.85bps to 0) (28 wider - 2 tighter <> 11 steeper - 19 flatter) - Trend Wider.
CDX14 ExHVOL +12.01bps to 105 (FV +3.47bps to 109.07) (84 wider - 11 tighter<> 53 steeper - 42 flatter).
CDX14 HY (30% recovery) Px $-1.91 to $93.97 / +52.1bps to 658.8 (FV +35.13bps to 640.11) (97 wider - 3 tighter <> 43 steeper - 57 flatter) - Trend Wider.
LCDX14 (70% recovery) Px $-1.3 to $94.44 / +38.34bps to 404.98 - Trend Wider.
MCDX14 +9bps to 258bps. - Trend Wider.
ITRX13 Main +0.17bps to 126.25bps (FV-1.44bps to 129.17bps).
ITRX13 Xover +17.93bps to 566bps (FV+9.14bps to 565.31bps).
ITRX13 FINLs -9.07bps to 156.5bps (FV-7.07bps to 164.32bps).
DXY weakened 1.03% to 84.44.
Oil fell $6.59 to $72.27.
Gold fell $44 to $1211.6.
VIX increased 1.59pts to 30.16%.
10Y US Treasury yields fell 13.2bps to 2.98%.
S&P500 Futures lost 5.62% to 1014.3.
Market Summary (Friday-to-Friday)
Spreads were broadly wider in the US as all the indices deteriorated. Indices typically underperformed single-names with skews mostly narrower as IG underperformed but narrowed the skew, HVOL outperformed but narrowed the skew, ExHVOL intrinsics beat and narrowed the skew, HY's skew widened as it underperformed.
Comparing the relative HY and IG moves to their 50-day rolling beta, we see that HY underperformed by around 3.9bps (or 7%). Interestingly, based on short-run empirical betas between IG, HY, and the S&P, stocks underperformed HY by an equivalent 40.8bps (~ 78%), and stocks underperformed IG by an equivalent 8bps (~ 87%) - (implying IG outperformed HY (on an equity-adjusted basis)).
The names having the largest impact on IG are Altria Group Inc (-55bps) pushing IG 0.43bps tighter, and SLM Corp (+83.25bps) adding 0.55bps to IG. HVOL is more sensitive with Reynolds American Inc. pushing it 1.59bps tighter, and SLM Corp contributing 2.33bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Altria Group Inc (-55bps) pushing the index 0.56bps tighter, and Transocean Ltd. (+30bps) adding 0.26bps to ExHVOL.
The price of investment grade credit fell 0.38% to around 99.01% of par, while the price of high yield credits fell 1.91% to around 93.97% of par. ABX market prices are lower by 0.26% of par or in absolute terms, 1.4%. Volatility (VIX) is up 1.59pts to 30.16%, with 10Y TSY rallying (yield falling) 13.2bps to 2.98% and the 2s10s curve flattened by 10bps, as the cost of protection on US Treasuries fell 3.7bps to 36.75bps. 2Y swap spreads widened 0.3bps to 37.5bps, as the TED Spread tightened by 3.5bps to 0.37% and Libor-OIS deteriorated 0.1bps to 33.9bps.
The Dollar weakened with DXY falling 1.03% to 84.437, Oil falling $6.59 to $72.27 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 5.03% today (a 9.39% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $44 to $1211.6 as the S&P is down (1014.3 -5.62%) underperforming IG credits (123bps -0.38%) while IG, which opened the week tighter at 113.875bps, outperforms HY credits. IG13 and XOver13 are +7.38bps and +17.93bps respectively while ITRX13 is +0.17bps to 126.25bps.
Dispersion rose +5.7bps in IG. Broad market dispersion is less than historically expected given current spread levels, pointing to a more sanguine view of credits as investors discriminate less between names, with dispersion increasing more than expected this week indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.
62% of IG credits are shifting by more than 3bps and 31% of the CDX universe are also shifting significantly (less than the 5 day average of 45%). The number of names wider than the index stayed at 51 as the day's range rose to 14.25bps (one-week average 10.2bps), between low bid at 112.5 and high offer at 126.75 and higher beta credits (4.97%) underperformed lower beta credits (3.88%).
In IG, wideners outpaced tighteners by around 11-to-1, with 112 credits wider. By sector, CONS saw 92% names wider, ENRGs 71% names wider, FINLs 95% names wider, INDUs 93% names wider, and TMTs 92% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG exFINLs) with the former trading at 118.69bps and the latter at 118.57bps.
Cross Market, we are seeing the HY-XOver spread decompressing to 92.75bps from 58.61bps, and remains above the short-term average of 72.38bps, with the HY/XOver ratio rising to 1.16x, above its 5-day mean of 1.13x. The IG-Main spread decompressed to -3.25bps from -12.33bps, and remains above the short-term average of -8.07bps, with the IG/Main ratio rising to 0.97x, above its 5-day mean of 0.94x. Among the HY names, we see higher risk names (>500bps) underperforming lower risk (<500bps) names. In the IG names, we see higher beta names underperforming lower beta names.
In the US, non-financials underperformed financials (as majors were unch to marginally tighter) as IG ExFINLs are wider by 4.6bps to 118.6bps, with 9 of the 106 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 2.09bps to 158.25bps, with Finance names (worst) wider by 30.43bps to 420.21bps, Brokers (best) wider by 2.5bps to 216.17bps, and Banks wider by 2.46bps to 132.63bps. Monolines are trading wider on average by 20.98bps (2.26%) to 2769.4bps.
In IG, FINLs underperformed non-FINLs (5.69% wider to 4% wider respectively), with the former (IG FINLs) wider by 10.4bps to 192.6bps, with 0 of the 19 names tighter. The IG CDS market (as per CDX) is 13.4bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (109.59bps), with the bond ETFs outperforming the IG CDS market by around 4.02bps.
In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 2.48bps to 118.69bps (with ITRX FINLs -trending tighter- better by 9.07 to 156.5bps) and is currently trading in the middle of the week's range at 41.09%, between 123.98 to 115bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading tight to its week's range at 14.63%, between 112.82 to 105.71bps. ExHVOL underperformed LoVOL as the differential decompressed to -1.75bps from -15.32bps, and remains above the short-term average of -6.46bps. The Main exFINLS to IG ExHVOL differential compressed to 13.69bps from 23.22bps, and remains below the short-term average of 17.04bps.
The Emerging Market index is 5.1% riskier (13.4bps wider) to 278.2bps. EM (Trend Wider) is currently trading at the wides of the week's range at 100.18%, between 278.2 to 259bps. The HY-EM spread decompressed to 380.52bps from 341.89bps, and remains above the short-term average of 367.58bps, with the HY/EM ratio rising to 2.37x, above its 5-day mean of 2.35x.
Index Internals (Friday-to-Friday)
Within the 240 name CDX Index Universe, sentiment is significantly bearish, with 209 (89%) wideners to 13 (7%) tighteners and 96 (41%) steepeners to 129 (55%) flatteners (14.9 wideners for every tightener). Among this universe, there are no credits with a bullish trend, and 21 with a bearish trend (based on the previous five days trading action). The market's general sentiment is evident as we note that 95 credits are at the widest in their 5-day range currently, and 8 are at their tightest. Notably, from the 240 name index universe, there are 52 (~22%) credits that have inverted curves, with an average inversion of 28% of 5Y CDS.
Within the IG universe, dispersion overall has risen 5.7bps to 109.6bps, 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 (7bps /7.49%) to 100.5bps, and the 90th percentile increased the least (-0.4bps /-0.15%) to 237.2bps.
IG Sector Moves and Betas (Friday-to-Friday)
In IG, INDU (the worst sector) out-performed IG, moving (on average) 6.5bps (6.26%) wider to an average of 111.1bps. TMT (the second weakest sector) out-performed IG, moving (on average) 6.2bps (6.02%) wider to an average of 109.8bps. FINL (the median sector) out-performed IG, moving (on average) 10.4bps (5.69%) wider to an average of 192.6bps. CONS (the second best sector) out-performed IG, moving (on average) 2.4bps (2.52%) wider to an average of 99.4bps. ENRG (the best sector) out-performed IG, moving (on average) 3.8bps (2.06%) wider to an average of 188.2bps.
From the top-down, index capital structure changes shifted both weaker with credit outperforming equity. The sectors were mixed with CONS (equity beating credit as they both deteriorate), ENRG (equity beating credit as they both deteriorate), FINL (equity beating credit as they both deteriorate), INDU (equity beating credit as they both deteriorate), and TMT (both weaker with credit outperforming equity).
CDX-based regression betas indicate that TMT (1.06x) have the highest beta and ENRG (0.9x) the lowest, with INDU (1.03x), CONS (0.97x), and FINL (0.92x) in between. Comparing the regression betas to current level betas we see that CONS (0.27x rich) is the richest sector, while FINL (-0.53x cheap) is the cheapest, with TMT (0.19x rich), INDU (0.16x rich), and ENRG (-0.53x cheap) trading more in line.
Single-Name Movers (Friday-to-Friday)
The biggest absolute movers in IG were SLM Corp (+83.25bps), Alcoa Inc. (+37.5bps), and Transocean Ltd. (+30bps) in the underperformers, and Altria Group Inc (-55bps), Reynolds American Inc. (-47.5bps), and Valero Energy Corp. (-5.37bps) in the outperformers. The biggest percentage movers in IG were Dell Inc. (+14.83%), SLM Corp (+14.74%), and Nordstrom Inc. (+12.83%) in the underperformers, and Altria Group Inc (-23.91%), Reynolds American Inc. (-19.79%), and Motorola Inc. (-3.87%) in the outperformers.
In Main, the biggest percentage movers were Portugal Telecom International Finance B.V. (+15.94%), Sanofi-Aventis (+15.08%), and Telefonica SA (+8.44%) in the underperformers, and BP PLC (-18.64%), Gas Natural SDG SA (-10.05%), and Intesa Sanpaolo S.p.A. (-8.95%) in the outperformers.The largest absolute movers in Main were Portugal Telecom International Finance B.V. (+27.77bps), Telefonica SA (+13.5bps), and Telecom Italia SpA (+11.5bps) in the underperformers, and BP PLC (-106.25bps), Banco Espirito Santo SA (-26.43bps), and Gas Natural SDG SA (-26.25bps) in the outperformers.
The biggest percentage movers in XOver were BCM Ireland Finance Ltd (+16.98%), International Power Plc (+14.41%), and Havas SA (+6.9%) in the underperformers, and Cognis GmbH (-18.54%), Norske Skogindustrier ASA (-6.84%), and British Airways Plc (-3.88%) in the outperformers.The largest absolute movers in XOver were BCM Ireland Finance Ltd (+637.25bps), ONO Finance, PLC (+57.41bps), and International Power Plc (+49bps) in the underperformers, and Norske Skogindustrier ASA (-83.92bps), Seat Pagine Gialle SpA (-26.8bps), and British Airways Plc (-23.44bps) in the outperformers.
In the names of the HY index, the biggest percentage movers were Beazer Homes USA Inc (+15.05%), Royal Caribbean Cruises Ltd (+14.58%), and Lennar Corp. (+12.87%) in the underperformers, and Flextronics International Ltd. (-1.47%), Brunswick Corp. (-1.43%), and PolyOne Corp (-0.39%) in the outperformers. The largest absolute movers in HY were K Hovnanian Enterprises, Inc. (+150.01bps), Dynegy Holdings Inc. (+136.76bps), and First Data Corp (+130.37bps) in the underperformers, and Brunswick Corp. (-7.81bps), Flextronics International Ltd. (-5bps), and PolyOne Corp (-2.24bps) in the outperformers.
The CDR Counterparty Risk Index Series 2 (of brokers and banks) fell -2.09bps (or -1.31%) to 158.25bps. Morgan Stanley (10bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Dresdner Bank AG (7.82%) is the worst (relative) performer. Royal Bank of Scotland Group Plc (-9.17bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and Credit Suisse Group (-6.21%) is the best (relative) performer.
The CDR Aussie Index rose 4.14bps (or 3.52%) to 121.83bps. Westpac Banking Corporation (11.32bps) is the worst (absolute) performer, whilst Westpac Banking Corporation (9.04%) is the worst (relative) performer. BHP Billiton Ltd (-2.82bps) is the best (absolute) performer, and SingTel Optus Pty Ltd (-3.36%) is the best (relative) performer.
The CDR Asian Index rose 0.54bps (or 0.42%) to 129.09bps. Reliance Industries Ltd. (19.96bps) is the worst (absolute) performer, whilst Reliance Industries Ltd. (12.09%) is the worst (relative) performer. Promise Co Ltd (-46.73bps) is the best (absolute) performer, and SK Telecom Co Ltd (-10.91%) is the best (relative) performer.