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CDS Rerack: Equity Catching Up To Credit

Tyler Durden's picture


While equity markets in the US have been hurt hard the last 24 hours, credit has been signaling notably more weakness than equities for a while. Today's action follows a similar path to Europe with equities underperforming credit and catching up to credit's view. Last night saw the credit indices close considerably cheap to their fair-value as investors grabbed index overlays as the most liquid hedges - today we some unwind of that as HY bonds are net sold and single-name CDS are decompressing considerably.

IG17 5Y is +5.75bps at 145.75bps but fair-value (single-name driven) is +8.5bps at 144.5bps (so clearly macro hedges have been unwound into micro hedges). HY16 3Y is +29bps while fair-value is +40bps reflecting a very similar pattern of rotation and that is helping credit appear to be outperforming equity on the day from the top-down - but realistically it is not pretty under the covers.

US Banks have been crushed with many showing inverted (or at best flat) curves:

BAC +35 at 405bps

C +25 at 285bps

JPM +12 at 157bps

WFC +11 at 155bps

GS +25 at 292bps

MS +38 at 397.5bps

Insurers are dramatically wider also (as their levered exposure to HY debt) with our mini-insurer index +15bps at 219bps.

Interestingly low beta credits are underperforming (which fits with rotation from macro to micro hedges) and we suspect this is simply a reflection of buying the cheapest protection available as opposed to reflective of creditworthiness among some of these names.

The Energy and TMT sectors are almost as weak as Financials with CONSumers outperforming overall but still notably wider.

Finally, in keeping with our theme today on sovereign risk, USA protection costs have spiked 7bps to 57.5bps - back to late July wides.



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Thu, 09/22/2011 - 13:22 | 1697766 Don Birnam
Don Birnam's picture

A quick aside...

...Where in the world is Mohammed ? A two-day bath such as this, and nary a glimpse of El-Arian's mug on CNBC.

Thu, 09/22/2011 - 13:37 | 1697846 Whatta
Whatta's picture

and where is Buffett? someone needs to be cheerleading this fiasco.

Thu, 09/22/2011 - 13:24 | 1697786 Irish66
Irish66's picture

banks are about to cliff dive

Thu, 09/22/2011 - 14:06 | 1697944 Cliff Claven Cheers
Cliff Claven Cheers's picture

But hey jobless claims are down. Don't overlook that.

Thu, 09/22/2011 - 13:25 | 1697791 pettolicious
pettolicious's picture

Is there anyone more unaware than Zach Karabell?    What a tool?

Thu, 09/22/2011 - 13:27 | 1697807 Irish66
Irish66's picture

He will be fired!

Thu, 09/22/2011 - 13:26 | 1697798 BrocilyBeef
BrocilyBeef's picture
Equity Catching Up To Credit <-- kinda says it all.
Thu, 09/22/2011 - 13:26 | 1697800 GeneMarchbanks
GeneMarchbanks's picture

interconnectedness is a bitch

Thu, 09/22/2011 - 13:34 | 1697837 Captn Morgan
Captn Morgan's picture

Buffet should continue his investing in financials, this should be great news for him.

Thu, 09/22/2011 - 13:37 | 1697845 cwilli01
cwilli01's picture

Why is MS almost at BAC levels? Are they in trouble?

Thu, 09/22/2011 - 13:41 | 1697860 junkyardjack
junkyardjack's picture

I'm sure its just the HFTs, they should be fine...

Thu, 09/22/2011 - 13:56 | 1697907 Edward Fiatski
Edward Fiatski's picture

Holy, oil is down $5.4 - global recovery, bitchez.

Thu, 09/22/2011 - 13:59 | 1697914 Cliff Claven Cheers
Cliff Claven Cheers's picture

Do you really think the gov or fed are going to let any US banks fail.  I doubt it since they have taken extraordinary steps to keep them as walking zombies.

Thu, 09/22/2011 - 14:02 | 1697925 kito
kito's picture

the world is BENding over, just asking for the big one!!!!!!!!!!!!!!!!!!!!!!!!!!

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