Daily Credit Summary: June 24 - FOMC Kegels

Spreads were tighter in the US as all the indices improved (though 2-3bps wider than the pre-FOMC tights in IG). 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's skew increased as the index outperformed, and HY outperformed but narrowed the skew.

Only 9.6% of names in IG moved more than their historical vol would imply as higher vol names underperformed lower vol names by -1.23% to -1.87%. IG's vol is around 4.38% per 1 day period, which leaves 98 names higher vol and 27 lower vol than the index.

The names having the largest impact on IG are CIT Group Inc (-35.86bps) pushing IG 0.18bps tighter, and Constellation Energy Group Inc. (+22.5bps) adding 0.18bps to IG. HVOL is more sensitive with CIT Group Inc pushing it 0.81bps tighter, and American International Group, Inc. contributing 0.68bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Toll Brothers, Inc. (-8.75bps) pushing the index 0.09bps tighter, and Constellation Energy Group Inc. (+22.5bps) adding 0.23bps to ExHVOL.

The price of investment grade credit rose 0.2% to around 98.29% of par, while the price of high yield credits rose 1.37% to around 83% of par. ABX market prices are higher (improving) by 0.1% of par or in absolute terms, 0.78%. Broadly speaking, CMBX market prices are higher (improving) by 0.62% of par or in absolute terms, 0.2%. Volatility (VIX) is down 1.53pts to 29.05%, with 10Y TSY selling off (yield rising) 7.2bps to 3.7% and the 2s10s curve flattened by 3.6bps, as the cost of protection on US Treasuries fell 7.36bps to 39.5bps. 2Y swap spreads tightened 6.3bps to 39.95bps, as the TED Spread widened by 0.7bps to 0.42% and Libor-OIS improved 0.1bps to 36.8bps.

The Dollar strengthened with DXY rising 0.87% to 80.539, Oil falling $0.64 to $68.6 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 1.52% today (a 0.05% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $5.57 to $931.4 as the S&P rallies (897.4 0.81%) outperforming IG credits (140.75bps 0.2%) while IG, which opened tighter at 143bps, underperforms HY credits. IG11 and XOver11 are -4bps and -28bps respectively while ITRX11 is -7.12bps to 121.13bps.

The majority of credit curves flattened 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).

Dispersion fell -0.7bps 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 today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.

Only 35% of IG credits are shifting by more than 3bps and 50% of the CDX universe are also shifting significantly (less than the 5 day average of 52%). The number of names wider than the index stayed at 46 as the day's range rose to 6bps (one-week average 5.98bps), between low bid at 138 and high offer at 144 and higher beta credits (-1.13%) underperformed lower beta credits (-1.48%).

In IG, wideners were outpaced by tighteners by around 3-to-1, with only 30 credits notably wider. By sector, CONS saw 30% names wider, ENRGs 19% names wider, FINLs 33% names wider, INDUs 14% names wider, and TMTs 22% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 121.73bps and the latter at 120.6bps.

Cross Market, we are seeing the HY-XOver spread compressing to 266.97bps from 288.65bps, but remains below the short-term average of 297.86bps, with the HY/XOver ratio falling to 1.36x, below its 5-day mean of 1.4x. The IG-Main spread decompressed to 19.62bps from 17.25bps, and remains above the short-term average of 19.37bps, with the IG/Main ratio rising to 1.16x, above its 5-day mean of 1.16x.

In the US, non-financials outperformed financials as IG ExFINLs are tighter by 1.9bps to 120.6bps, with 69 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 5.32bps to 169.18bps, with Finance names (worst) tighter by 8.52bps to 737.52bps, Brokers (best) tighter by 4.5bps to 198.2bps, and Banks tighter by 4.07bps to 231.83bps. Monolines are trading wider on average by 175.19bps (5.73%) to 3001.47bps.

In IG, FINLs underperformed non-FINLs (0.54% tighter to 1.58% tighter respectively), with the former (IG FINLs) tighter by 1.9bps to 352.3bps, with 11 of the 21 names tighter. The IG CDS market (as per CDX) is 38.8bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (101.99bps), with the bond ETFs outperforming the IG CDS market by around 0.61bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) rallied 7.27bps to 121.73bps (with ITRX FINLs -trading sideways- better by 6.5 to 118.75bps) and is currently trading tight to its week's range at 15.95%, between 129 to 120.35bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading tight to its week's range at 11.51%, between 87.99 to 81.86bps. ExHVOL underperformed LoVOL as the differential decompressed to 0.08bps from -1.86bps, but remains below the short-term average of 0.44bps. The Main exFINLS to IG ExHVOL differential compressed to 39.09bps from 42.87bps, and remains below the short-term average of 39.62bps.

Commentary compliments of www.creditresearch.com

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -2.11bps to 176.72 (9 wider - 31 tighter <> 23 steeper - 24 flatter).

CDX12 IG -5bps to 140.5 ($0.21 to $98.3) (FV -2.06bps to 157.22) (28 wider - 79 tighter <> 59 steeper - 65 flatter) - No Trend.

CDX12 HVOL -11.5bps to 322 (FV -4.98bps to 399.97) (7 wider - 20 tighter <> 19 steeper - 11 flatter) - No Trend.

CDX12 ExHVOL -2.95bps to 83.18 (FV -1.21bps to 88.35) (21 wider - 74 tighter <> 55 steeper - 40 flatter).

CDX11 XO -8bps to 374.5 (FV -7.21bps to 453.29) (8 wider - 23 tighter <> 19 steeper - 14 flatter) - Trend Wider.

CDX12 HY (30% recovery) Px $+1.31 to $82.94 / -47.6bps to 1014.6 (FV -10.67bps to 919.83) (19 wider - 70 tighter <> 55 steeper - 37 flatter) - Trend Tighter.

LCDX12 (65% recovery) Px $+1.45 to $82.65 / -79.35bps to 852.35 - Trend Wider.

MCDX12 +2bps to 215bps. - Trend Wider.

CDR Counterparty Risk Index fell 5.12bps (-2.93%) to 169.38bps (2 wider - 12 tighter).

CDR Government Risk Index fell 4.71bps (-6.91%) to 63.47bps.

DXY strengthened 0.87% to 80.54.

Oil fell $0.64 to $68.6.

Gold rose $5.57 to $931.4.

VIX fell 1.53pts to 29.05%.

10Y US Treasury yields rose 7.2bps to 3.7%.

S&P500 Futures gained 0.81% to 897.4.