Daily Credit Summary: August 12 - Bearish Breadth

Spreads were mostly wider in the US today as ExHVOL is the only index tighter thanks to HVOL's underperformance (with HY underperforming IG as the former broke above 800bps intraday). Indices generally outperformed intrinsics (as it appears single-name protection buyers were hedging with index protection) 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. IG opened gap at its wides and did leak tighter most of the day but intrinsics did not follow and the weakness in HY suggests that investors were looking at HY-IG decompression.

The names having the largest impact on IG are Toll Brothers, Inc. (-13bps) pushing IG 0.1bps tighter, and CIT Group Inc (+151.82bps) adding 0.58bps to IG. HVOL is more sensitive with Ryder System Inc. pushing it 0.09bps tighter, and CIT Group Inc contributing 2.54bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Toll Brothers, Inc. (-13bps) pushing the index 0.14bps tighter, and Fortune Brands Inc. (+12.5bps) adding 0.13bps to ExHVOL.

The price of investment grade credit rose 0% to around 99.44% of par, while the price of high yield credits fell 0.41% to around 89.47% of par (as we note that credit was defiant to any equity strength today in builders, insurers, banks, and autos). ABX market prices are higher (improving) by 0.21% of par or in absolute terms, 0.2%. Broadly speaking, CMBX market prices are higher (improving) by 0.12% of par or in absolute terms, 0.03%. Volatility (VIX) is down -0.54pts to 25.45%, with 10Y TSY selling off (yield rising) 4.1bps to 3.71% and the 2s10s curve steepened by 6.5bps, as the cost of protection on US Treasuries rose 0.66bps to 26.5bps. 2Y swap spreads tightened 1.6bps to 39.19bps, as the TED Spread tightened by 0bps to 0.28% and Libor-OIS improved 0bps to 26.4bps.

The Dollar weakened with DXY falling 0.32% to 78.921, Oil rising $0.76 to $70.21 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 1.09% today (a 0.77% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $0.05 to $946.15 as the S&P rallies (1002.7 0.99%) outperforming IG credits (113.5bps 0%) while IG, which opened tighter at 112.5bps, outperforms HY credits. IG11 and XOver11 are +15.43bps and +6bps respectively while ITRX11 is +1.5bps to 92bps.

The majority of credit curves steepened 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 rose +15bps 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 today indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads.

54% of IG credits are shifting by more than 3bps and 59% of the CDX universe are also shifting significantly (more than the 5 day average of 50%). The number of names wider than the index increased by 1 to 39 as the day's range fell to 5.75bps (one-week average 6.07bps), between low bid at 111.25 and high offer at 117 and higher beta credits (3.62%) outperformed lower beta credits (4.7%).

In IG, wideners outpaced tighteners by around 7-to-1, with 99 credits wider. By sector, CONS saw 81% names wider, ENRGs 75% names wider, FINLs 76% names wider, INDUs 68% names wider, and TMTs 96% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 92.5bps and the latter at 88.22bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 183.68bps from 176.99bps, but remains above the short-term average of 166.12bps, with the HY/XOver ratio rising to 1.3x, above its 5-day mean of 1.28x. The IG-Main spread compressed to 21.5bps from 23bps, but remains above the short-term average of 20.69bps, with the IG/Main ratio falling to 1.23x, above its 5-day mean of 1.23x.

In the US, non-financials outperformed financials as IG ExFINLs are wider by 3.3bps to 88.2bps, with 12 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 5.94bps to 121.63bps, with Brokers (worst) wider by 8.88bps to 151.58bps, Finance names (best) wider by 20.49bps to 913.09bps, and Banks wider by 5.79bps to 160.47bps. Monolines are trading wider on average by 119.71bps (2.11%) to 3571.73bps.

In IG, FINLs underperformed non-FINLs (4.7% wider to 3.83% wider respectively),
with the former (IG FINLs) wider by 13.1bps to 291.6bps, with 3 of the 21 names tighter. The IG CDS market (as per CDX) is 27.3bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (86.17bps), with the bond ETFs underperforming the IG CDS market by around 1.83bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 1.25bps to 92.5bps (with ITRX FINLs -trading sideways- weaker by 2.5 to 90bps) and is currently trading at the wides of the week's range at 100%, between 92.5 to 86.25bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading in the middle of the week's range at 67.03%, between 69.16 to 62.29bps. ExHVOL outperformed LoVOL as the differential compressed to -0.61bps from 2.16bps, but remains above the short-term average of -2.95bps. The Main exFINLS to IG ExHVOL differential decompressed to 26.21bps from 23.22bps, but remains below the short-term average of 27.13bps. (note that HY-IG is underperforming XOver-Main and we like that decompression RV trade for a cheap long vol play bearish).

Commentary compliments of www.creditresearch.com

Index/Intrinsics Changes
CDR LQD 50 NAIG091 +3.66bps to 133.46 (39 wider - 8 tighter <> 29 steeper - 19 flatter).
CDX12 IG +0.5bps to 114 ($-0.02 to $99.42) (FV +4.86bps to 120.71) (100 wider - 13 tighter <> 70 steeper - 54 flatter) - Trend Wider.
CDX12 HVOL +7.5bps to 265 (FV +12.65bps to 313.76) (22 wider - 5 tighter <> 22 steeper - 8 flatter) - Trend Wider.
CDX12 ExHVOL -1.71bps to 66.32 (FV +2.58bps to 66.55) (78 wider - 17 tighter <> 47 steeper - 48 flatter).
CDX11 XO +8bps to 278.9 (FV +10.21bps to 322.39) (25 wider - 4 tighter <> 19 steeper - 15 flatter) - Trend Tighter.
CDX12 HY (30% recovery) Px $-0.47 to $89.41 / +14.6bps to 798.1 (FV +29.37bps to 724.17) (83 wider - 5 tighter <> 27 steeper - 67 flatter) - Trend Wider.
LCDX12 (65% recovery) Px $-0.65 to $94.85 / +23.65bps to 670.96 - Trend Wider.
MCDX12 0bps to 145bps. - Trend Tighter.
CDR Counterparty Risk Index rose 5.92bps (5.12%) to 121.62bps (14 wider - 0 tighter).
CDR Government Risk Index rose 1.55bps (3.62%) to 44.25bps. (notable for the thrid day in a row significantly wider)
DXY weakened 0.32% to 78.92.

Oil rose $0.76 to $70.21.
Gold rose $0.05 to $946.15.
VIX fell 0.54pts to 25.45%.
10Y US Treasury yields rose 4.1bps to 3.71%.
S&P500 Futures gained 0.99% to 1002.7.