Daily Credit Summary: August 23 - Low Volume, Low Range, Low Growth

Commentary courtesy of www.creditresearch.com

Spreads closed marginally wider, at the worst levels of the day, after an anemic volume day that only picked up in activity when we weakened. Overnight angst from Australia combined with some weakness in EU data was marginally trumped early on by M&A chatter and headline spin on US ECO data but further evidence of a deflationary view of the world (NSC 100Y issue) seemed to provide some downward pressure and despite valiant attempts to steepen the curve or drive AUDJPY up, stocks ended at their lows of the day as did spreads at their wides.

A slow summer day saw the hung parliament in Australia spur some instant deterioration in AUD crosses which was quickly reversed through the European hours (thanks to some JPY movement that is worth watching). Stock futures did not make as aggressive a move (as perhaps the realization of the fine line between the Aussie parties was evident) and both AUDJPY and stock futures drifted higher into the US open.

European spreads inched back some of their losses from Friday's weakness but all closed wider than Thursday's close with FINLs and SovX most notably so. Both of these indices saw only very small rallies today even with some relatively decent reracks in the PIIGS nations today (PIIGS were -11bps on average today with Ireland barely back below 300bps, Italy just under 200bps, while Greece remains very near record wides). These sovereign CDS moves did not seem 'real' in the sense of aggressive buying since we also saw decompression in the bond spreads relative to Bunds in the PIIGS (Greece +11bps for example).

This underlying weakness in the FINLs (and Sovs) saw relative outperformance of the European non-financials (the US did not sell-off notably until well after the EU close) with Main ExFINLs -2bps to 106bps (still wider than Thursday's close) and XOver -7bps (a hair below 500bps but also wider than Thursday's close).

This modest strength saw US spreads open tighter in the indices (and marginally tighter in intrinsics and only a handful of single-names showed any notable moves). For IG we rallied with stocks out of the gate. Stocks made it back to Friday's highs (and late Thursday's highs) before running out of steam but IG managed to get tighter than Friday's tights stalling around 107.25bps bid - which was the tightest it would reach for the day. IG legged wider as stocks dropped (back wider than Friday's close) before stocks found some support at overnight lows and leaked higher - IG only managed to get back to its opening levels before stocks and AUDJPY legged back down with no 'save' into the close and IG reached up to new highs intraday at 110bps offered (wider than Thursday's wides but shy of the 112bps on Friday).

Prior to this late day surge, the intraday range was one of the lowest on record for IG (in relative terms) and this trend has been the case for weeks now - with occcasional bursts of activity. The chart below shows the IG range in absolute and relative terms is very low and has typically seen a resurgence once it gets this low - most often with a upside (widening) bias.

HY painted a similar picture today as stocks and IG but with a notable difference. A modest gap tighter open, with a small rally and then a bigger selloff was the story with a little more positivity as stocks rallied off support in the early afternoon. The difference was a tempting intraday tight (high price) breakout art around 3pmET (which IG and stocks did not make) and which was very quickly rejected as we ripped back from intraday tights to make new intraday wides at 576bps. This made HY's close, its widest since 8/16 along with IG.

Most notably, at least for level-lovers, was today's HY close was the first wider than the 200-day average since 7/21 and the closest to the 50-day average (in vol terms) since 7/6. Interestingly at the current level, HY is basically break-even (carry aside) with its average price since inception. 585bps is the 50-day average and might be useful to watch for a break tomorrow. In IG, we remain just below the 50-day, at 110.5bps, but well wider than the 200-day average.

Some context is useful when considering the recent moves in credit and equity. Today's close in VIX and the S&P is very close to the close from 7/21. However, other asset classes have performed very differently during that 4-5 week period: HY is 20bps tighter, IG is 1.75bps tighter, 10Y TSY is 28.4bps lower in yield, Gold +$41 and Oil -$3.4. FINLs have notably outperformed non-FINLs although the outperformance has largely come from the insurers that have tracked HY (we reiterate) while the majors have underperformed with BofA worst. ENRG names have performed the best overall as 'safety' and yield preferences were paramount.

Critically though (at least to us), the outperformance of HY index is 'anomalous' in many ways. HY intrinsics are only 2bps tighter, given empirical beta with IG, HY's move is hugely excessive, relative to stocks - IG is very close to being in sync top-down but HY is notably better performing and perhaps even more interestingly HY and IG cash market spreads are very marginally wider over this period. HY remains notably rich to intrinsics and we humbly suggest the momentum runners, after all the bond flow headlines, may be getting squeezed (at least by the nature of the late day surge, gap, and widening of bid-offer in HY14 this afternoon).

The clear preference over this period for bonds over equities - or as we describe it an up-in-capital-structure shift - may in some minds imply equity outperformance is due (to catch up with the 'tight' spreads) but it appears the regime of the last year or two is at an end with regard to that empirical relationship and perhaps today's NSC 100Y deal is the best example of that.

The re-opening of the century deal and pricing modestly above Par (around 5.95% yield) suggests some major deflationary tail hedging demand was out there. While the bond's duration was not crazy high, the fact that buyers emerged suggests some fears remain of much more catastrophic times ahead. It was enough to frighten stock holders out of the railroads and as it priced so well and was upsized could perhaps have been a factor in the weakening of equities late in the day.

We have had a number of clients asking about our views on the forthcoming GM IPO. Suffice it to say, and in the interests of brevity, we are not overly impressed and worry about this on many fronts as anything but a flipper's fantasy (drop us a line for somewhat more coherent thoughts). Most notably we have noticed something rather fascinating in the Auto sector. The relationship between GM's 2016 bonds and the Ford Equity price has been amazingly (and we mean incredibly) consistent for many months now - a simple arb at around 2.5x Ford's stock price explains huge amounts of variance in the GM bond price and we suggest tracking this going into the IPO for any signs of a preference. One we would expect is selling of Ford to buy into the GM IPO in hopes of flipping soon after and still leaving the manager equally exposed to the Auto sector - this would also be interesting as the GM bonds have residual ownership in the new GM and may be a decent hedge here should the deal be 'better' than many expected. Just thinking out loud on this but we will keep an eye on it.

Some details on today was the better-than-expected CFNAI print - which when adjusted for the prior revision downwards remains far weaker than the headlines might suggest, the demand and low yield in the 30Y TIPS auction, and the odd action in 2s5s30s and 2s10s30s as the long-end steepened against modest flattening in the belly. Either this is rate-locks/IR hedging on that uber-long-dated NSC deal, some TIPS RV trades, front-running of the longer-dated POMO this week, or simply a reflection of the short-term deflation vs long-term inflation push and pull market remain mired in.

Tighteners outpaced wideners on the day but moves were small in general with only 14% of all names moving by more than 3bps. FINLs underperformed non-FINLs on the day in the US with SLM weakest in IG, AIG's modest credit line reduction good enough for it to be the best absolute performer at a measly 5bps compression. Interestingly the monolines, and tail risk names in IG9 underperformed quite a bit today while IG9 actually outperformed IG14 top-down - leading to some speculation on idiosyncratic risk leaking back into the markets and this was certainly more exaggerated as we sold off into the close.

All-in-all, a relatively quiet volume day with most action at the start and at the end (same old same old) but this time some levels and relationships unable to come to the rescue in the last few minutes. With housing and GDP prints this week before the long weekend, we would expect moves off that data to be very hard and then peter out. Compared to XOver and Main, HY and IG remain notably rich to intrinsics (especially HY) and perhaps a bet on the higher beta HY names (or for a cheaper alternative - grab some of the insurers. After the close, AUDJPY is still leaking lower holding stock futures down.

Thanks to all for your good wishes last Friday - i did the 86.5miles in 5hr15mins (6450ft of ascent) and won the bet (<6hrs and he buys the beers for the month of my birthday).

Index/Intrinsics Changes
CDR LQD 50 NAIG -1.05bps to 101.86 (8 wider - 38 tighter <> 28 steeper - 20 flatter).

CDR Counterparty Risk Index fell 1.12bps (-0.85%) to 131.16bps (6 wider - 8 tighter).

CDR Government Risk Index fell 2.12bps (-2.02%) to 102.86bps..

CDX14 IG +0.75bps to 109.75 ($-0.02 to $99.58) (FV -0.5bps to 113.35) (29 wider - 84 tighter <> 62 steeper - 60 flatter) - No Trend.

CDX14 HVOL -0.47bps to 157.9 (FV -0.78bps to 0) (5 wider - 23 tighter <> 13 steeper - 16 flatter) - No Trend.

CDX14 ExHVOL +1.14bps to 94.54 (FV -0.42bps to 93.52) (24 wider - 71 tighter <> 46 steeper - 49 flatter).

CDX14 HY (30% recovery) Px $-0.13 to $97 / +3.2bps to 576.1 (FV -2.14bps to 592.66) (32 wider - 62 tighter <> 61 steeper - 37 flatter) - Trend Wider.

LCDX14 (70% recovery) Px $+0.02 to $96 / -0.38bps to 357.77 - Trend Wider.

MCDX14 +0.55bps to 225.25bps. - No Trend.

ITRX13 Main -2bps to 111.75bps (FV-0.94bps to 113.96bps).

ITRX13 Xover -7.61bps to 499.5bps (FV-4.24bps to 485.78bps).

ITRX13 FINLs -1.15bps to 135bps (FV-0.61bps to 134.26bps).

DXY strengthened 0.17% to 83.2.

Oil fell $0.46 to $73.

Gold fell $2.3 to $1225.5.

VIX increased 0.17pts to 25.66%.

10Y US Treasury yields fell 1.2bps to 2.6%.

S&P500 Futures lost 0.46% to 1065.4.

Single-Name Movers
The biggest absolute movers in IG were SLM Corp (+35.37bps), Valero Energy Corp. (+5.75bps), and Campbell Soup Company (+3bps) in the underperformers, and Toll Brothers, Inc. (-6.14bps), American International Group, Inc. (-5.37bps), and General Electric Capital Corp (-4.6bps) in the outperformers. The biggest percentage movers in IG were Campbell Soup Company (+7.59%), SLM Corp (+5.33%), and Pfizer Inc. (+3.81%) in the underperformers, and International Business Machines Corp. (-3.55%), Chubb Corp. (-3.51%), and Home Depot Inc. (-3.36%) in the outperformers.

In the more financial-heavy CDR NAIG LQD 50 index, sentiment is mixed with 8 wider to 38 tighter, and 28 steeper to 20 flatter as 4 of the 50 credits have inverted curves. The biggest absolute movers were HSBC Finance Corporation (+7.5bps), Campbell Soup Company (+3bps), and Bank of America Corp. (+2bps) in the underperformers, and Capital One Financial Corp. (-5.5bps), JP Morgan Chase & Co. (-5bps), and General Electric Capital Corp (-4.5bps) in the outperformers. The biggest percentage movers in the CDR NAIG LQD 50 were Campbell Soup Company (+7.59%), HSBC Finance Corporation (+4.35%), and Sara Lee Corp. (+2.48%) in the underperformers, and JP Morgan Chase & Co. (-4.74%), Capital One Financial Corp. (-4.56%), and International Business Machines Corp. (-3.55%) in the outperformers.

In Main, the biggest percentage movers were SABMiller plc (+22.01%), Zurich Insurance Company (+4.1%), and Allianz SE (+3.57%) in the underperformers, and Xstrata Plc (-4.55%), ArcelorMittal (-3.92%), and Glencore International AG (-3.8%) in the outperformers.The largest absolute movers in Main were SABMiller plc (+16.76bps), Zurich Insurance Company (+4.25bps), and Axa (+3.12bps) in the underperformers, and Glencore International AG (-14.62bps), ArcelorMittal (-14.08bps), and Xstrata Plc (-11.29bps) in the outperformers.

The biggest percentage movers in XOver were Seat Pagine Gialle SpA (+2.96%), Rallye S.A. (+1.01%), and Thomson S.A. (+0.75%) in the underperformers, and FCE Bank PLC (-3.83%), ITV plc (-3.64%), and Nielsen Company/The (-3.53%) in the outperformers.The largest absolute movers in XOver were Seat Pagine Gialle SpA (+61.7bps), Rallye S.A. (+5.69bps), and NXP b.v. (+5.44bps) in the underperformers, and BCM Ireland Finance Ltd (-78.68bps), FCE Bank PLC (-16.52bps), and Cable & Wireless Plc (-13.43bps) in the outperformers.

In the names of the HY index, the biggest percentage movers were K Hovnanian Enterprises, Inc. (+2.68%), RRI Energy, Inc. (+2.06%), and Goodyear Tire & Rubber Co. (+2%) in the underperformers, and iStar Financial Inc. (-4.15%), Mirant North America LLC (-2.72%), and Boyd Gaming Corporation (-2.35%) in the outperformers. The largest absolute movers in HY were K Hovnanian Enterprises, Inc. (+40.44bps), MBIA Inc (+33.86bps), and RRI Energy, Inc. (+15.31bps) in the underperformers, and iStar Financial Inc. (-52.93bps), Dynegy Holdings Inc. (-28.61bps), and Boyd Gaming Corporation (-25.37bps) in the outperformers.

The CDR Counterparty Risk Index Series 2 (of brokers and banks) fell -1.12bps (or -0.85%) to 131.16bps. Bank of America Corp. (2bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Bank of America Corp. (1.25%) is the worst (relative) performer. Royal Bank of Scotland Group Plc (-5.79bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and JP Morgan Chase & Co. (-4.74%) is the best (relative) performer.

The CDR Aussie Index fell -0.4bps (or -0.37%) to 106.81bps. Macquarie Bank Limited (2.04bps) is the worst (absolute) performer, whilst Amcor Limited (1.4%) is the worst (relative) performer. BHP Billiton Ltd (-4bps) is the best (absolute) performer, and RIO Tinto Ltd (-3.62%) is the best (relative) performer.

The CDR Asian Index fell -0.17bps (or -0.16%) to 108.54bps. State Bank of India (3.22bps) is the worst (absolute) performer, whilst Hitachi Ltd (1.89%) is the worst (relative) performer. Kobe Steel Ltd (-9.29bps) is the best (absolute) performer, and Kobe Steel Ltd (-8.5%) is the best (relative) performer.

Movers in Detail

Spreads were wider in the US with IG worse and HY selling off. IG trades 0.9bps tight (rich) to its 50d moving average, which is a Z-Score of -0.1s.d.. At 109.75bps, IG has closed tighter on 200 days in the last 423 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. HY trades 36.1bps wide (cheap) to its 50d moving average, which is a Z-Score of -0.2s.d. and at 576.07bps, HY has closed tighter on 112 days in the last 423 trading days (JAN09).

Indices typically underperformed single-names with skews widening in general as IG underperformed but narrowed the skew, HVOL underperformed but widened the skew, ExHVOL's skew widened as it underperformed, HY intrinsics beat and the skew tightened.

Comparing the relative HY and IG moves to their 50-day rolling beta, we see that HY underperformed by around 0.5bps (or 16%). Interestingly, based on short-run empirical betas between IG, HY, and the S&P, stocks underperformed HY by an equivalent 3.6bps (~ 112%), and stocks underperformed IG by an equivalent 0.6bps (~ 81%) - (implying IG outperformed HY (on an equity-adjusted basis)).

The names having the largest impact on IG are Toll Brothers, Inc. (-6.14bps) pushing IG 0.05bps tighter, and SLM Corp (+35.37bps) adding 0.23bps to IG. HVOL is more sensitive with Toll Brothers, Inc. pushing it 0.2bps tighter, and SLM Corp contributing 0.97bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Kinder Morgan Energy Partners LP (-4.5bps) pushing the index 0.05bps tighter, and Valero Energy Corp. (+5.75bps) adding 0.06bps to ExHVOL.

The price of investment grade credit fell 0.02% to around 99.58% of par, while the price of high yield credits fell 0.125% to around 97% of par. ABX market prices are lower by 0% of par or in absolute terms, 0.03%. Volatility (VIX) is up 0.17pts to 25.66%, with 10Y TSY rallying (yield falling) 1.2bps to 2.6% and the 2s10s curve flattened by 0.4bps, as the cost of protection on US Treasuries fell 0.82bps to 46bps. 2Y swap spreads tightened 0.9bps to 16.88bps, as the TED Spread tightened by 1.7bps to 0.17% and Libor-OIS improved 1.4bps to 14bps.

The Dollar strengthened with DXY rising 0.19% to 83.215, Oil falling $0.43 to $73.03 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 0.4% today (a 0.4% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $2.25 to $1225.55 as the S&P is down (1065.4 -0.46%) underperforming IG credits (109.75bps -0.02%) while IG, which opened tighter at 107.5bps, outperforms HY credits. IG13 and XOver13 are -1.25bps and -7.36bps respectively while ITRX13 is -2bps to 111.75bps.

Dispersion rose +1.5bps 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 less between names, with dispersion increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.

Only 12% of IG credits are shifting by more than 3bps and 31% of the CDX universe are also shifting significantly (less than the 5 day average of 37%). The number of names wider than the index decreased by 1 to 54 as the day's range fell to 3bps (one-week average 3.42bps), between low bid at 107 and high offer at 110 and higher beta credits (-0.56%) outperformed lower beta credits (-0.34%).

In IG, tighteners outpaced wideners by around 2-to-1, with 33 credits wider. By sector, CONS saw 26% names wider, ENRGs 29% names wider, FINLs 16% names wider, INDUs 44% names wider, and TMTs 13% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG exFINLs) with the former trading at 105.94bps and the latter at 103.51bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 76.32bps from 65.71bps, and remains above the short-term average of 71.78bps, with the HY/XOver ratio rising to 1.15x, above its 5-day mean of 1.14x. The IG-Main spread decompressed to -2bps from -4.75bps, and remains above the short-term average of -2.58bps, with the IG/Main ratio rising to 0.98x, above its 5-day mean of 0.98x. Among the HY names, we see higher risk names (>500bps) outperforming 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 tighter by 0.5bps to 103.5bps, with 63 of the 106 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 1.12bps to 131.16bps, with Finance names (worst) tighter by 2.25bps to 412.31bps, Banks (best) tighter by 2.08bps to 125.08bps, and Brokers tighter by 1.5bps to 182.67bps. Monolines are trading wider on average by 84.12bps (2.26%) to 2595.97bps.

In IG, FINLs underperformed non-FINLs (0.15% tighter to 0.5% tighter respectively), with the former (IG FINLs) tighter by 0.3bps to 169.9bps, with 14 of the 19 names tighter. The IG CDS market (as per CDX) is -6.2bps rich (we'd expect LQD to outperform TLH) to the LQD-TLH-implied valuation of investment grade credit (115.97bps), with the bond ETFs outperforming the IG CDS market by around 1.36bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) rallied 2.21bps to 105.94bps (with ITRX FINLs -trending wider- better by 1.15 to 135bps) and is currently trading in the middle of the week's range at 47.99%, between 110.21 to 102bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading in the middle of the week's range at 40.65%, between 98.37 to 89.92bps. ExHVOL underperformed LoVOL as the differential decompressed to 1.19bps from -2.75bps, and remains above the short-term average of -1.48bps. The Main exFINLS to IG ExHVOL differential compressed to 11.4bps from 14.74bps, and remains below the short-term average of 13.57bps.

The Emerging Market index is 0.7% less risky (1.7bps tighter) to 248.8bps. EM (Trend Wider) is currently trading at the wides of the week's range at 84.38%, between 250.5 to 239.4bps. The HY-EM spread decompressed to 327.3bps from 322.34bps, and remains above the short-term average of 324.34bps, with the HY/EM ratio rising to 2.32x, below its 5-day mean of 2.32x.


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