Daily Credit Summary: July 29 - Range Day

Spreads were mostly tighter in the US today with HVOL outperforming IG (pushing ExHVOL wider) but HY continuing its rally (albeit with both IG and HY in extremely narrow intraday ranges of 3 and 25bps respectively). Indices generally outperformed intrinsics with skews mostly narrower (although not enough to warrant index arb expectations as we saw IG/HVOL9 underperforming IG/HVOL12 on further CIT/SLM/monoline weakness and suspected correlation book hedging) as IG underperformed but narrowed the skew, HVOL outperformed but widened the skew, ExHVOL intrinsics beat and narrowed the skew, XO's skew increased as the index outperformed, and HY outperformed but narrowed the skew.

The names having the largest impact on IG are Hartford Financial Services Group (-60bps) pushing IG 0.47bps tighter, and CIT Group Inc (+126.27bps) adding 0.47bps to IG. HVOL is more sensitive with Hartford Financial Services Group pushing it 2.1bps tighter, and CIT Group Inc contributing 2.1bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Time Warner Cable Inc. (-15bps) pushing the index 0.16bps tighter, and Valero Energy Corp. (+35bps) adding 0.34bps to ExHVOL.

The price of investment grade credit rose 0% to around 99.34% of par, while the price of high yield credits rose 0.25% to around 88.75% of par (look at the apparent richness of JNK and HYG ETFs to NAV for some idea of money flow). ABX market prices are lower by 0.68% of par or in absolute terms, 1.37%. Broadly speaking, CMBX market prices are lower by 0.6% of par or in absolute terms, 0.17%. Volatility (VIX) is up 0.6pts to 25.61%, with 10Y TSY rallying (yield falling) 2.4bps to 3.67% and the 2s10s curve flattened by 10.6bps, as the cost of protection on US Treasuries rose 0.43bps to 30bps. 2Y swap spreads tightened 4.5bps to 36.13bps, as the TED Spread widened by 0.1bps to 0.31% and Libor-OIS improved 0.5bps to 29bps.

The Dollar strengthened with DXY rising 0.83% to 79.508, Oil falling $4.31 to $62.92 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 5.61% today (a 5.58% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $7.95 to $929.55 as the S&P is down (974.6 -0.13%) underperforming IG credits (115.75bps 0%) while IG, which opened wider at 116.5bps, underperforms HY credits. IG11 and XOver11 are +0.84bps and -0.75bps respectively while ITRX11 is -1bps to 94.25bps.

Dispersion rose +5.6bps 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.

42% of IG credits are shifting by more than 3bps and 48% of the CDX universe are also shifting significantly (less than the 5 day average of 52%). The number of names wider than the index decreased by 1 to 38 as the day's range fell to 3bps (one-week average 4.95bps), between low bid at 115 and high offer at 118 and higher beta credits (-1.64%) outperformed lower beta credits (-1.49%).

In IG, wideners were outpaced by tighteners by around 2-to-1, with 33 credits notably wider. By sector, CONS saw 27% names wider, ENRGs 56% names wider, FINLs 24% names wider, INDUs 18% names wider, and TMTs 17% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 96.56bps and the latter at 91.88bps.

Cross Market, we are seeing the HY-XOver spread compressing to 164.99bps from 172.06bps, but remains below the short-term average of 190.37bps, with the HY/XOver ratio falling to 1.25x, below its 5-day mean of 1.29x. The IG-Main spread decompressed to 21.5bps from 20.5bps, but remains below the short-term average of 22.63bps, with the IG/Main ratio rising to 1.23x, below its 5-day mean of 1.24x.

In the US, non-financials underperformed financials as IG ExFINLs are tighter by 1.1bps to 91.9bps, with 58 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 2.15bps to 115.02bps, with Finance names (worst) wider by 28.75bps to 933.17bps, Brokers (best) tighter by 5.75bps to 133.83bps, and Banks tighter by 4.93bps to 157.47bps. Monolines are trading wider on average by 214.63bps (4.54%) to 4389.07bps.

In IG, FINLs outperformed non-FINLs (2.4% tighter to 1.14% tighter respectively), with the former (IG FINLs) tighter by 7.9bps to 320bps, with 14 of the 21 names tighter. The IG CDS market (as per CDX) is 31.5bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (84.2bps), with the bond ETFs outperforming the IG CDS market by around 2.38bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 1bps to 96.56bps (with ITRX FINLs -trading sideways- better by 1 to 85bps) and is currently trading in the middle of the week's range at 33.64%, between 102.28 to 93.66bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading in the middle of the week's range at 73.1%, between 69.97 to 63.38bps. ExHVOL underperformed LoVOL as the differential decompressed to -9.05bps from -11.52bps, and remains above the short-term average of -9.08bps. The Main exFINLS to IG ExHVOL differential compressed to 37.42bps from 40.75bps, and remains below the short-term average of 39.34bps.


Commentary courtesy of www.creditresearch.com

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -2.26bps to 140.87 (15 wider - 24 tighter <> 29 steeper - 20 flatter).
CDX12 IG 0bps to 115.75 ($0 to $99.34) (FV -2.08bps to 128.02) (33 wider - 70 tighter <> 74 steeper - 51 flatter) - Trend Tighter.
CDX12 HVOL -7.39bps to 295 (FV -7.24bps to 349.48) (9 wider - 18 tighter <> 18 steeper - 12 flatter) - Trend Tighter.
CDX12 ExHVOL +2.33bps to 59.14 (FV -0.59bps to 66.76) (24 wider - 71 tighter <> 39 steeper - 56 flatter).
CDX11 XO -3.8bps to 316.7 (FV -1.49bps to 389.04) (13 wider - 15 tighter <> 15 steeper - 18 flatter) - Trend Tighter.
CDX12 HY (30% recovery) Px $+0.25 to $88.75 / -7.8bps to 818.5 (FV -4.92bps to 765.9) (31 wider - 51 tighter <> 44 steeper - 46 flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $+0.05 to $89.75 / -1.72bps to 555.85 - Trend Tighter.
MCDX12 +1.75bps to 164.75bps. - No Trend.
CDR Counterparty Risk Index fell 2.23bps (-1.9%) to 114.93bps (8 wider - 6 tighter).
CDR Government Risk Index rose 0.42bps (0.93%) to 45bps..
DXY strengthened 0.83% to 79.51.
Oil fell $4.31 to $62.92.
Gold fell $7.95 to $929.55.
VIX increased 0.6pts to 25.61% (and Implied Correlation rose once again)
10Y US Treasury yields fell 2.4bps to 3.67%.
S&P500 Futures lost 0.13% to 974.6.


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