Commentary courtesy of www.creditresearch.com
Spreads were mixed this week with indices modestly tighter but intrinsics notable wider as our view of the overlay unwinds into idiosyncratic derisking appears to be playing out in cash and synthetic credit. Europe outperformed US this week with help broadly from FINLs and Sovereigns but the same theme of underlying name underperformance against index outperformance was evident everywhere (especially at the HY/XOver end of the credit spectrum).
Flattening in 3s5s curves (index and intrinsics), bond underperformance of CDS, and over four-to-one negative breadth is hidden by the apparent calm at the surface with indices barely budging in the week in credit and stocks managing some relatively healthy gains (though not able to comfortably break the post-NFP high print in ES_F).
ENRG names underperformed all other sectors this week but US FINLs were also quite weak. (dominated by a handful of really exceptional moves). Healthcare and Utilities dominated the best performers (safety first) as dispersion rose dramatically on the week fitting perfectly with our thesis of increased discrimination and a swing from systemic to idiosyncratic risk awareness. Low beta Transports also saw relative outperformance, which we suspect is as much driven by correlation desk hedging at the other end of the spectrum for the huge gaps in APC/RIG as it was a safety play.
Off-the-run indices underperformed significantly - matching their intrinsics moves more closely - over the week, once again adding to conviction that index outperformance this week was more technically driven by equity shenanigans and index overlay unwinds as it was any real rerisking efforts.
Watch this week for further bond underperformance and/or skew compression - there is much more going on down here in the weeds than is evident at the aggregate levels and we suspect sooner rather than later this sentiment will spread back up to the indices (and the realities of short- and longer-term funding markets).
Index/Intrinsics Changes (Friday-to-Friday)
CDR LQD 50 NAIG +6.89bps to 114.88 (37 wider - 9 tighter <> 30 steeper - 20 flatter).
CDR Counterparty Risk Index rose 1.6bps (0.94%) to 171.33bps (7 wider - 7 tighter).
CDR Government Risk Index fell 22.53bps (-17.68%) to 104.89bps..
CDX14 IG -0.61bps to 125.14 ($0.04 to $98.91) (FV +8.87bps to 131.99) (83 wider - 38 tighter <> 66 steeper - 59 flatter) - Trend Tighter.
CDX14 HVOL +5bps to 195 (FV +10.72bps to 0) (28 wider - 2 tighter <> 18 steeper - 12 flatter) - No Trend.
CDX14 ExHVOL -2.38bps to 103.08 (FV +8.3bps to 110.38) (55 wider - 40 tighter <> 47 steeper - 48 flatter).
CDX14 HY (30% recovery) Px $+0.16 to $93.75 / -4.5bps to 665.9 (FV +36.29bps to 647.16) (91 wider - 8 tighter <> 42 steeper - 57 flatter) - Trend Tighter.
LCDX14 (70% recovery) Px $-0.39 to $94.17 / +11.83bps to 414.13 - No Trend.
MCDX14 +36.59bps to 211.5bps. - Trend Wider.
ITRX13 Main +2.6bps to 129.85bps (FV+1.28bps to 129.76bps).
ITRX13 Xover +4.58bps to 595.58bps (FV+18.25bps to 578.31bps).
ITRX13 FINLs -12.5bps to 170.5bps (FV-10.68bps to 175.54bps).
DXY weakened 1.08% to 87.28.
Oil rose $2.74 to $74.25.
Gold rose $6.8 to $1226.7.
VIX fell 6.69pts to 28.79%.
10Y US Treasury yields rose 3.2bps to 3.24%.
S&P500 Futures gained 2.17% to 1089.2.
Market Summary (Friday to Friday)
Indices generally outperformed intrinsics with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but narrowed the skew, ExHVOL outperformed pushing the skew wider, HY outperformed but narrowed the skew.
Comparing the relative HY and IG moves to their 50-day rolling beta, we see that HY outperformed by around 1.7bps (or 38%). Interestingly, based on short-run empirical betas between IG, HY, and the S&P, stocks outperformed HY by an equivalent 31.4bps, and stocks outperformed IG by an equivalent 6bps - (implying IG underperformed HY (on an equity-adjusted basis)).
The names having the largest impact on IG are Freeport-McMoRan Copper & Gold Inc. (-20bps) pushing IG 0.15bps tighter, and Anadarko Petroleum Corp. (+338.14bps) adding 2.18bps to IG. HVOL is more sensitive with Ryder System Inc. pushing it 0.17bps tighter, and XL Capital Limited contributing 2.07bps to HVOL's change today. The less volatile ExHVOL's move this week is driven by both Freeport-McMoRan Copper & Gold Inc. (-20bps) pushing the index 0.2bps tighter, and Anadarko Petroleum Corp. (+338.14bps) adding 2.84bps to ExHVOL.
The price of investment grade credit rose 0.04% to around 98.91% of par, while the price of high yield credits rose 0.16% to around 93.75% of par. ABX market prices are higher (improving) by 0.04% of par or in absolute terms, 0.53%, while CMBX prices fell on average. Volatility (VIX) is down 6.69pts to 28.79%, with 10Y TSY selling off (yield rising) 3.2bps to 3.24% and the 2s10s curve steepened by 3.2bps, as the cost of protection on US Treasuries fell 6.2bps to 37.17bps. 2Y swap spreads tightened 7.4bps to 39.13bps, as the TED Spread widened by 5.2bps to 0.47% and Libor-OIS deteriorated 1.2bps to 32.4bps.
The Dollar weakened with DXY falling 1.08% to 87.28, Oil rising $2.74 to $74.25 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 3.26% today (a 2.75% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $6.8 to $1226.7 as the S&P rallies (1089.2 2.17%) outperforming IG credits (125.14bps 0.05%) while IG, which opened tighter at 123bps, underperforms HY credits. IG13 and XOver13 are +1.52bps and +4.58bps respectively while ITRX13 is +2.6bps to 129.845bps.
Dispersion rose +21.5bps 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 more between names, with dispersion increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.
57% of IG credits are shifting by more than 3bps and 40% of the CDX universe are also shifting significantly (less than the 5 day average of 47%). The number of names wider than the index increased by 8 to 52 as the week's range fell to 11bps (recent average 15bps), between low bid at 122.5 and high offer at 133.5 and higher beta credits (4.24%) outperformed lower beta credits (5.2%).
In IG, wideners outpaced tighteners by around 2-to-1, with 83 credits wider. By sector, CONS saw 47% names wider, ENRGs 88% names wider, FINLs 89% names wider, INDUs 37% names wider, and TMTs 96% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG exFINLs) with the former trading at 119.68bps and the latter at 117.47bps.
Cross Market, we are seeing the HY-XOver spread compressing to 70.32bps from 79.39bps, and remains below the short-term average of 73.38bps, with the HY/XOver ratio falling to 1.12x, below its 5-day mean of 1.12x. The IG-Main spread compressed to -4.71bps from -1.5bps, but remains above the short-term average of -5.79bps, with the IG/Main ratio falling to 0.96x, above its 5-day mean of 0.96x. Among the HY names, we see higher risk names (>500bps) underperforming lower risk (<500bps) names. In the IG names, we see higher beta names outperforming lower beta names.
In the US, non-financials outperformed financials as IG ExFINLs are wider by 7.5bps to 117.5bps, with 36 of the 106 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 1.6bps to 171.33bps (with US members +20bps on the week), with Brokers (worst) wider by 29.67bps to 234.5bps, Finance names (best) wider by 24.06bps to 432.82bps, and Banks wider by 8.38bps to 150.54bps. Monolines are trading wider on average by 560.47bps (24.12%) to 3465.99bps.
In IG, FINLs underperformed non-FINLs (8.27% wider to 6.87% wider respectively), with the former (IG FINLs) wider by 16.5bps to 216.3bps, with 1 of the 19 names tighter. The IG CDS market (as per CDX) is 21bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (104.11bps), with the bond ETFs outperforming the IG CDS market by around 4.03bps.
In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 6.37bps to 119.68bps (with ITRX FINLs -trending tighter- better by 12.5 to 170.5bps) and is currently trading in the middle of the week's range at 54.21%, between 125.06 to 113.31bps, and is trading sideways. Main LoVOL (trend tighter) is currently trading tight to its week's range at 20.75%, between 119.49 to 107.59bps. ExHVOL outperformed LoVOL as the differential compressed to -6.98bps from -2.13bps, and remains below the short-term average of -6.83bps. The Main exFINLS to IG ExHVOL differential decompressed to 16.6bps from 7.85bps, and remains above the short-term average of 14.13bps.
The Emerging Market index is 0.5% riskier (1.5bps wider) to 291.8bps. EM (Trend Tighter) is currently trading tight to its week's range at 7.98%, between 308.8 to 290.3bps. The HY-EM spread compressed to 374.13bps from 380.13bps, but remains below the short-term average of 383.11bps, with the HY/EM ratio falling to 2.28x, above its 5-day mean of 2.28x.
Within the 240 name CDX Index Universe, sentiment is significantly bearish, with 174 (74%) wideners to 46 (21%) tighteners and 108 (46%) steepeners to 116 (49%) flatteners (3.7 wideners for every tightener). Notably, from the 240 name index universe, there are 55 (~23%) credits that have inverted curves, with an average inversion of 32% of 5Y CDS.
Within the IG universe, dispersion overall has risen 21.5bps to 114.1bps, as the wings of the distribution (10-90%) increased less than the centre (25-75%) of the distribution. The distribution shifted non-linearly as the 50th percentile increased the most (8.8bps /8.79%) to 108.3bps, and the 10th percentile increased the least (-1bps /-1.89%) to 51.9bps.
IG Sector Moves and Betas
In IG, ENRG (the worst sector) under-performed IG, moving (on average) 34.3bps (21.33%) wider to an average of 195.2bps. FINL (the second weakest sector) under-performed IG, moving (on average) 16.5bps (8.27%) wider to an average of 216.3bps. TMT (the median sector) under-performed IG, moving (on average) 5.3bps (5.14%) wider to an average of 107.7bps. INDU (the second best sector) under-performed IG, moving (on average) 2.1bps (1.94%) wider to an average of 110bps. CONS (the best sector) under-performed IG, moving (on average) 1.3bps (1.42%) wider to an average of 95.5bps.
From the top-down, index capital structure changes diverged as equity outperformed credit. The sectors were mixed with CONS (divergent as equity beats credit), ENRG (divergent as equity beats credit), FINL (divergent as equity beats credit), INDU (divergent as equity beats credit), and TMT (divergent as equity beats credit).
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 (0.32x rich) is the richest sector, while FINL (-0.7x cheap) is the cheapest, with TMT (0.23x rich), INDU (0.19x rich), and ENRG (-0.57x cheap) trading more in line.
Focusing on intra-sector movements within IG, we notice dispersion increasing the most in ENRG which shifted 69.62% to 192bps, and the least in CONS which shifted 1.28% to 51.8bps.
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 1.58x to 1.56x, and HVOL also moved closer to IG and further from IG as it trades with its trend tighter now at 37% of the XO-IG difference, down from 38.7%. ExHVOL is currently trading tight to its week's range at 6.99%, between 111.45 to 102.45bps. HY shifted tighter relative to IG, against its trend wider, now at 5.32x, down from 5.38x yesterday.
The HY-LCDX spread compressed to 251.77bps from 268.08bps, and remains below the short-term average of 268.03bps, with the HY/LCDX ratio falling to 1.61x, below its 5-day mean of 1.65x. The IG-MCDX differential compressed to -86.36bps from -49.16bps, and remains below the short-term average of -72.92bps, with the IG/MCDX ratio falling to 0.59x, below its 5-day mean of 0.64x. The HY-IG differential compressed to 540.76bps from 544.64bps, but remains below the short-term average of 554.74bps, with the HY/IG ratio falling to 5.32x, below its 5-day mean of 5.34x.
Both IG and HY are above (wider than) their opening levels today with HY's range of 28.32bps below the week's average range multiple of 5.82x IG's range, at 4.93x. HY is currently trading in the middle of the week's range at 36.76%, between 713.97 to 637.96bps. IG is currently trading in the middle of the week's range at 42.34%, between 133.5 to 119bps.
Our pivot point analysis suggests intraday resistance at 128.59bps in IG, and breaking support at 123.89bps or resistance at 130.89bps as significant, with the index trend bullish (based on pivot point moving average changes), shifting tighter by 0.31bps per day over the last few days. On a short-term basis (based on the last 5 days trading), we see 125.25bps as a critical pivot point with 131.5bps, 139.75bps, and 148bps as important resistance levels, and 117bps, 110.75bps, and 102.5bps as important support levels. The short-term 'protection' relative strength indicator on IG moved from strongly overbought to stable at 47.7%.
Our pivot point analysis suggests intraday resistance at 687.51bps in HY, and breaking support at 665.64bps or resistance at 703.02bps as significant, with the index trend bullish (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 672.41bps as a critical pivot point for HY with 706.86bps, 748.42bps, and 789.98bps as important resistance levels, and 630.85bps, 596.4bps, and 554.84bps as important support levels.On a short-term basis (based on the last 5 days trading), we see 672.41bps as a critical pivot point for HY with 706.86bps, 748.42bps, and 789.98bps as important resistance levels, and 630.85bps, 596.4bps, and 554.84bps as important support levels.
Single-Name Movers (Friday-to-Friday
The biggest absolute movers in IG were Anadarko Petroleum Corp. (+338.14bps), Transocean Ltd. (+217.7bps), and XL Capital Limited (+65bps) in the underperformers, and Freeport-McMoRan Copper & Gold Inc. (-20bps), Universal Health Services Inc (-17.5bps), and Aetna Inc (-7bps) in the outperformers. The biggest percentage movers in IG were Anadarko Petroleum Corp. (+95.25%), Quest Diagnostics Incorporated (+54.76%), and Transocean Ltd. (+49.48%) in the underperformers, and Freeport-McMoRan Copper & Gold Inc. (-8.33%), Aetna Inc (-7.22%), and Barrick Gold Corp. (-6.86%) in the outperformers.
In Main, the biggest percentage movers were BP PLC (+82.6%), Technip SA (+46.44%), and Carrefour S.A. (+25.9%) in the underperformers, and Banco Santander, S.A. (-19.46%), Iberdrola SA (-14.99%), and BNP Paribas (-14.05%) in the outperformers.The largest absolute movers in Main were BP PLC (+179.25bps), Hellenic Telecommunications Organization SA (+75bps), and Technip SA (+45.99bps) in the underperformers, and Banco Santander, S.A. (-44.7bps), Banco Bilbao Vizcaya Argentaria SA (-34.25bps), and Iberdrola SA (-30.86bps) in the outperformers.
The biggest percentage movers in XOver were Gecina SA (+16.09%), Rhodia SA (+11.95%), and Infineon Technologies AG (+10.42%) in the underperformers, and GKN Holdings Plc (-6.46%), Valeo SA (-4.26%), and ISS Holding A/S (-3.26%) in the outperformers.The largest absolute movers in XOver were ONO Finance, PLC (+88.12bps), TUI AG (+67.62bps), and Seat Pagine Gialle SpA (+62.08bps) in the underperformers, and ISS Holding A/S (-20.85bps), DSG International plc (-20bps), and GKN Holdings Plc (-15.92bps) in the outperformers.
In the names of the HY index, the biggest percentage movers were Level 3 Communications Inc. (+13.72%), ArvinMeritor Inc (+12.69%), and Weyerhaeuser Co (+12.68%) in the underperformers, and Mirant North America LLC (-4.17%), Sabre Holdings Corp (-3.26%), and Massey Energy Company (-1.86%) in the outperformers. The largest absolute movers in HY were Level 3 Communications Inc. (+200.56bps), K Hovnanian Enterprises, Inc. (+146.29bps), and AMR Corp (+129.99bps) in the underperformers, and Sabre Holdings Corp (-16.13bps), Massey Energy Company (-14.78bps), and Mirant North America LLC (-12.5bps) in the outperformers.
The CDR Counterparty Risk Index Series 2 (of brokers and banks) rose 1.6bps (or 0.94%) to 171.33bps. Morgan Stanley (50bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Morgan Stanley (20.41%) is the worst (relative) performer. Deutsche Bank AG (-20.54bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and BNP Paribas (-14.05%) is the best (relative) performer.
The CDR Aussie Index rose 16.87bps (or 15.02%) to 129.18bps. Woodside Petroleum Limited (49.6bps) is the worst (absolute) performer, whilst Woodside Petroleum Limited (31.48%) is the worst (relative) performer. Telecom Corporation of New Zealand Limited (6.11bps) is the best (absolute) performer, and Qantas Airways Ltd (5.93%) is the best (relative) performer.
The CDR Asian Index rose 10.2bps (or 8.1%) to 136.16bps. Promise Co Ltd (180.37bps) is the worst (absolute) performer, whilst Temasek Holdings (29.93%) is the worst (relative) performer. Mitsui Sumitomo Insurance Co Ltd (-3.63bps) is the best (absolute) performer, and East Japan Railway Company (-5.9%) is the best (relative) performer.