Weekly Credit Summary: September 11

Spreads tightened significantly from last Friday's close with HY massively outperforming IG as equities reversed their short-term losses to storm over 2.5% higher (close-to-close). This rally in risky assets was accompanied by a major drop in the dollar which shifted gold and oil higher and somewhat confusingly a rally in Treasuries - a flight to safety and risk. HY closed within 10% of its spread tights for the week while IG was more than 20% off its tights, but skews were cruished in IG and HVOL this week (especially the latter).

Most notable in credit this week is the dramatic outperformance of high beta IG/HVOL tail names relative to indices and low beta as curves steepened, rolls compressed and talk of a structured credit desk unwind lends credence to the forced unwind nature of a levered credit position rather than any pre-roll technicals kicking in yet.

Compression trades performed the best over the week with some key levels being broken: HY-IG back below 700bps (almost 600bps now), XOver-Main back below 500bps, ITRX FINL Subs back below 150bps, HY-LCDX back below 100bps, and HY-IG over XOver-Main dropped from over 200bps to under 150bps.

High beta credits more than doubled the performance of low beta this week as winners outpaced losers by 25-to-1. INDUstrials outperformed (thanks largely to TXT 121bps rally - good old GS conviction buy list) followed by TMT, ENRG, and CONSumers. CONSumer credits actually disappointed but this relates as much to the low beta unwind (ex KFT which was 28bps wider to 67bps this week) as the worst 30 performers in IG were all under 100bps and worst 10 names under 50bps!

Financials outperformed non-financials this week with ex-i-banks best, monolines worst, insurers all better (especially high beta), and banks better (as JPM underperformed and Citi was best). Sovereign risk was also significantly lower this week in both majors (led by Italy and Spain) and EM names (EEC underperformed though) as VIX only fell marginally on the week.

Commentary compliments of www.creditresearch.com

Index/Intrinsics Changes since Friday close
CDR LQD 50 NAIG -10.98bps to 90.54 (4 wider - 45 tighter <> 37 steeper - 13 flatter).
CDX12 IG -11.5bps to 110.5 ($0.49 to $99.57) (FV -15.56bps to 116.76) (6 wider - 117 tighter <> 86 steeper - 39 flatter) - Trend Tighter.
CDX12 HVOL -23.98bps to 255 (FV -47.86bps to 274.98) (0 wider - 30 tighter <> 24 steeper - 6 flatter) - Trend Tighter.
CDX12 ExHVOL -7.56bps to 64.87 (FV -5.96bps to 69.7) (6 wider - 89 tighter <> 33 steeper - 62 flatter).
CDX11 XO -44.1bps to 289.7 (FV -40.59bps to 329.47) (2 wider - 32 tighter <> 24 steeper - 10 flatter) - Trend Tighter.
CDX12 HY (30% recovery) Px $+4.44 to $91.88 / -136bps to 721.1 (FV -105.74bps to 669.51) (1 wider - 93 tighter <> 79 steeper - 15 flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $+2.8 to $96 / -103.38bps to 628.42 - Trend Tighter.
MCDX12 -2bps to 123bps. - No Trend.
CDR Counterparty Risk Index fell 13.67bps (-11.25%) to 107.86bps (0 wider - 14 tighter).
CDR Government Risk Index fell 5.22bps (-11.22%) to 41.33bps..
DXY weakened 1.81% to 76.72.
Oil rose $1.26 to $69.28.
Gold rose $10.8 to $1005.2.
VIX fell 1.11pts to 24.15%.
10Y US Treasury yields fell 9.1bps to 3.35%.
S&P500 Futures gained 2.73% to 1041.6.

Index Internals
Within the 240 name CDX Index Universe, sentiment is more bullish, with only 9 (4%) wideners to 222 (96%) tighteners and 173 (75%) steepeners to 60 (26%) flatteners (24.7 tighteners for every widener). Among this universe, there are 99 credits with a bullish trend, and 0 with a bearish trend (based on the previous five days trading action). The market's general sentiment is evident as we note that 5 credits are at the widest in their 5-day range currently, and 200 are at their tightest. Notably, from the 240 name index universe, there are 98 (~41%) credits that have inverted curves, with an average inversion of 26% of 5Y CDS.

Within the IG universe, dispersion overall has fallen -39.1bps to 219.1bps, as the wings of the distribution (10-90%) decreased more than the centre (25-75%) of the distribution. The distribution shifted non-linearly as the 25th percentile increased the most (-2.2bps /-4.52%) to 45.8bps, and the 75th percentile increased the least (-34.5bps /-18.65%) to 150.5bps.

Single-Name Movers since Friday close
This week's biggest absolute movers in IG were Kraft Foods Inc. (+28.39bps), Autozone Inc. (+6.8bps), and Du Pont E.I. de Nemours & Co (+1.84bps) in the wideners, and CIT Group Inc (-376.89bps), International Lease Finance Corp. (-188.83bps), and Textron Financial Corp (-120.62bps) in the tighteners. This week's biggest percentage movers in IG were Kraft Foods Inc. (+73.18%), Autozone Inc. (+10.85%), and Du Pont E.I. de Nemours & Co (+3.81%) in the wideners, and Textron Financial Corp (-25.91%), Marriott International Inc. (-21.99%), and Metlife, Inc. (-20.29%) in the tighteners.

In the more financial-heavy CDR NAIG LQD 50 index, sentiment is bullish with 4 wider to 45 tighter, and 37 steeper to 13 flatter as 13 of the 50 credits have inverted curves. The biggest absolute movers were Kraft Foods Inc. (+28.39bps), Autozone Inc. (+6.8bps), and VF Corporation (+2bps) in the wideners, and HSBC Finance Corporation (-44.42bps), Nordstrom Inc. (-36.06bps), and Southwest Airlines Co. (-36bps) in the tighteners. The biggest percentage movers in the CDR NAIG LQD 50 were Kraft Foods Inc. (+73.18%), Autozone Inc. (+10.85%), and VF Corporation (+4.21%) in the wideners, and Carnival Corp. (-20.13%), Capital One Financial Corp. (-19.66%), and Nordstrom Inc. (-18.58%) in the tighteners.

In XO11, this week's biggest percentage movers were Sears Roebuck Acceptance Corp. (+4.95%), Gap Inc (+0.33%), and Centex Corp (-1.43%) in the wideners, and Bombardier Inc. (-25.46%), MGM Mirage Inc (-19.31%), and Chesapeake Energy Corp. (-17.15%) in the tighteners. The largest absolute movers of the week in XO11 were Sears Roebuck Acceptance Corp. (+19.11bps), Gap Inc (+0.1bps), and Centex Corp (-1.16bps) in the wideners, and MGM Mirage Inc (-289.92bps), Smithfield Foods Inc (-140.19bps), and Bombardier Inc. (-122.94bps) in the tighteners.

In the names of the HY index, this week's biggest percentage movers were Dole Food Company, Inc. (+0.23%), American Axle & Manufacturing Inc (-1.02%), and Radian Group Inc (-2.68%) in the wideners, and DirecTV Holdings LLC (-35.57%), AMR Corp (-35.31%), and Energy Future Holdings Corp. (-26.54%) in the tighteners. The largest absolute movers in HY were Dole Food Company, Inc. (+1.28bps), American Axle & Manufacturing Inc (-11.92bps), and Tyson Foods Inc. (-12.55bps) in the wideners, and AMR Corp (-3148.56bps), Energy Future Holdings Corp. (-510.03bps), and Freescale Semiconductor, Inc. (-435.26bps) in the tighteners.

The CDR Counterparty Risk Index Series 2 (of brokers and banks) fell -13.67bps (or -11.25%) to 107.86bps. JP Morgan Chase & Co. (-4.78bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst JP Morgan Chase & Co. (-6.61%) is the worst (relative) performer. Citigroup Inc (-35bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and Goldman Sachs Group Inc (-15.96%) is the best (relative) performer.

The CDR Aussie Index fell -13.4bps (or -12.93%) to 90.24bps. Qantas Airways Ltd (-1.2bps) is the worst (absolute) performer, whilst Qantas Airways Ltd (-0.77%) is the worst (relative) performer. QBE Insurance Group Limited (-26.52bps) is the best (absolute) performer, and Telecom Corporation of New Zealand Limited (-27.51%) is the best (relative) performer.

The CDR Asian Index fell -1.57bps (or -1.41%) to 110.03bps. Promise Co Ltd (152.5bps) is the worst (absolute) performer, whilst Promise Co Ltd (20.75%) is the worst (relative) performer. Shinhan Bank (-18.1bps) is the best (absolute) performer, and East Japan Railway Company (-27%) is the best (relative) performer.

Market Summary for the week
Spreads were tighter in the US as all the indices improved (with HY dramatically outperforming IG as the latter closed 20% off its spread tights and the former only 9% from the week's tightest levels). IG trades 11.3bps tight (rich) to its 50d moving average, which is a Z-Score of -1.1s.d.. At 109.5bps, IG has closed tighter on only 2 days so far this year (182 trading days). The last five days have seen IG diverging from its 50d moving average. Indices generally outperformed intrinsics with skews mostly narrower as HVOL narrows its skew to contact tights as tail names see massive compression.

The names having the largest impact on IG are CIT Group Inc (-376.89bps) pushing IG 1.63bps tighter, and Kraft Foods Inc. (+28.39bps) adding 0.23bps to IG. HVOL is more sensitive with CIT Group Inc pushing it 7.11bps tighter, and Canadian Natural Resources Limited contributing -0.31bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both National Rural Utilities Cooperative Finance Corporation (-43.7bps) pushing the index 0.44bps tighter, and Kraft Foods Inc. (+28.39bps) adding 0.3bps to ExHVOL.

The price of investment grade credit rose 0.49% to around 99.57% of par, while the price of high yield credits rose 4.445% to around 91.88% of par. ABX market prices are higher (improving) by 0.18% of par or in absolute terms, 1.17%. Broadly speaking, CMBX market prices are higher (improving) by 0.49% of par or in absolute terms, 0.14%. Volatility (VIX) is down 1.11pts to 24.15%, with 10Y TSY rallying (yield falling) 9.1bps to 3.35% and the 2s10s curve flattened by 6.6bps, as the cost of protection on US Treasuries fell 4.03bps to 22.665bps. 2Y swap spreads tightened 3.9bps to 31.94bps, as the TED Spread tightened by 2.4bps to 0.16% and Libor-OIS improved 1.4bps to 13bps.

The Dollar weakened with DXY falling 1.81% to 76.723, Oil rising $1.26 to $69.28 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 0.76% today (a 0.04% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $10.8 to $1005.2 as the S&P rallies (1041.6 2.73%) outperforming IG credits (110.5bps 0.49%) while IG, which opened the week way wider at 123.5bps, underperforms HY credits. IG11 and XOver11 are -7.74bps and -59.56bps respectively while ITRX11 is -11.84bps to 85.5bps.

The majority of credit curves steepened as the vol term structure flattened with VIX/VIXV rising implying a more bullish/less volatile short-term outlook (normally indicative of short-term spread compression expectations).

Dispersion fell 39.1bps 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.

77% of IG credits are shifting by more than 3bps and 64% of the CDX universe are also shifting significantly (more than the 5 day average of 49%). The number of names wider than the index decreased by 1 to 43 as the week's range rose to 17.25bps (one-month average 19.5bps), between low bid at 106.75 and high offer at 124bps and higher beta credits (-12.7%) outperformed lower beta credits (-6.59%).

In IG, wideners were massively outpaced by tighteners by around 25-to-1, with only 6 credits notably wider. By sector, CONS saw 14% names wider, ENRGs 0% names wider, FINLs 0% names wider, INDUs 4% names wider, and TMTs 0% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 86.69bps and the latter at 89.79bps.

Cross Market, we are seeing the HY-XOver spread compressing to 162.68bps from 239.11bps, and remains below the short-term average of 205.77bps, with the HY/XOver ratio falling to 1.29x, below its 5-day mean of 1.35x. The IG-Main spread decompressed to 25bps from 24.66bps, and remains above the short-term average of 24.72bps, with the IG/Main ratio rising to 1.29x, above its 5-day mean of 1.27x.

In the US, non-financials underperformed financials as IG ExFINLs are tighter by 10.5bps to 89.8bps, with 96 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 13.67bps to 107.86bps, with Banks (worst) tighter by 16.6bps to 138.83bps, Finance names (best) tighter by 133.46bps to 769.26bps, and Brokers tighter by 19.66bps to 142.25bps. Monolines are trading wider on average by 264.44bps (1.62%) to 4904.48bps.

In IG, FINLs outperformed non-FINLs (14.02% tighter to 10.46% tighter respectively), with the former (IG FINLs) tighter by 41.9bps to 256.9bps, with 21 of the 21 names tighter. The IG CDS market (as per CDX) is 24.7bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (85.76bps), with the bond ETFs underperforming the IG CDS market by around 11.36bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 11.61bps to 86.69bps (with ITRX FINLs -trending tighter- better by 12.75 to 80.75bps) and is currently trading tight to its week's range at 0%, between 99.18 to 86.69bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at 10.82%, between 69.95 to 62.84bps. ExHVOL outperformed LoVOL as the differential compressed to 1.26bps from 2.48bps, but remains below the short-term average of 2.68bps. The Main exFINLS to IG ExHVOL differential compressed to 21.82bps from 25.87bps, and remains below the short-term average of 23.68bps.

The Emerging Market index is 3.8% less risky (11.7bps tighter) to 300.9bps. EM10 (Trend Tighter) is currently trading tight to its week's range at 18.61%, between 315.5 to 297.6bps. The HY-EM spread compressed to 420.19bps from 544.45bps, and remains below the short-term average of 492.59bps, with the HY/EM ratio falling to 2.4x, below its 5-day mean of 2.62x.

Comments

[Anonymous]

We mere mortals need a guide to interpreting this weekly report. I have no clue.

[phaesed]

Hrmmmm.... does anyone know how much debt (especially Foreign!) has been issued in dollars over the past 6 months?

Deflation will really hurt the hell out of any nation who jumped on the short dollar bandwagon...

And whoever thinks that the banks want debt to mature during excessive inflation is a moron.

[capitalisa]

Did I miss Zero's 9-11 remembrance post?  Don't see it anywhere.

[Anonymous]

There is only one explanation: the markets see treasuries as a risky asset.

[Anonymous]

This commentary rules, btw. Thanks for posting.

Corporate debt issuance stats, courtesy of Sifma.org...YTD for 2009 as of July; column 1 is Invest. Grade, column 2 is High yield, column 3 is total issuance.

Jan 65.4 5.2 70.6
Feb 73.6 3.9 77.5
Mar 67.6 1.7 69.3
Apr 37.3 9.3 46.6
May 93.4 23.2 116.6
Jun 62.3 15.8 78.2
Jul 42.8 13.0 55.9

[phaesed]

Thank you for this link, you just gave me a wealth of data. 

[joebren]

JNK:TLT; EEM:TLT; and FXI:TLT all seem to be making head & shoulder tops - RS at the mo. There may be some serious risk aversion ahead.

[phaesed]

Intesting couplings, a few different Bond ETF's you might want to look at are BWX & EMB, International Treasuries and Emerging Markets.... thanks for that further idea...

[Anonymous]

For a previous posting asking about further break-down on this commentary: the detail listed is what passes in the fixed-income markets as a data dump. It's better to start at the basics and move ahead from there, so here's my shot at trying to aid:

Frank Fabozzi is a well-known academic & professor; anything by him will be an excellent starting point. One title I have is "Bond Markets. analysis and strategies". Could probably search for "bond basics" or "corporate bond basics" and load up on the caffeination prior to doing so. Others likely have other / additional suggestions, but that's a starting point.

Corporate bonds get segregated into 2 sectors, on the most generic of descriptors: Investment grade (bonds rated BBB or higher) and high yield (bonds rated BBB- and lower. High yield incorporates a wide spectrum...speculative, junk, anything highly-levered +/-.

Segregate by investment rating, then by sector and sub-sector (much like the SPX has sub-sectors for banks, insurance, finance, etc). Bond indexes, over time, have become highly stylized & bifurcated for investing purposes.

[joann]

Any comments about the "coincidence" of:

“The Dow Jones industrial average is down 22 at 9,605.41 on 9/11/09.  That is nearly identical to the Dow’s finish of 9,605.51 eight years ago, the day before the 9/11/01 terror attacks.”