Daily Credit Summary: June 9 - Unusually Uncertain

Commentary courtesy of www.creditresearch.com

Spreads closed wider today, at their worst levels of the day, as EURJPY weakness following (more coincidentally than dependently) the Beige Book, led risk assets dramatically lower this afternoon. HY underperformed IG, closing above 700bps for the first time since 11/3/09 as equity was, once again, the far higher beta trade on the day (relative to FX and credit) and closed slightly outperforming credit.

Overnight we saw positive news from China (exports from China have surged year-over-year with the latest report showing a 50% increase during that time period - though we see animal spirits as a lot less ebullient over the past month than in April), a decent PORTUG bond issue (though at cheap rates), and some covering ahead of the ECB tomorrow. This helped push FX and stocks to its best levels since Friday but credit remained (how many more times do we have to say this?) less sanguine.

Main and XOver closed tighter on the day, but only managing to get back to Monday's levels, as skews narrowed nicely in pretty much all the indices and RV trades seemed to see some unwinds. EM and Asian Sovereigns underperformed SovX but we hear this was much more pre-ECB covering of profitable shorts than laying out of new longs. Main remains cheap to IG (even with IG's underperformance today) and Main ExFINLs 4bps cheap to IG ExFINLs.

Another wide range day in S&P futures (ahead of their roll to SEP contracts tomorrow) was much higher variance than we saw in IG and HY for most of the day but as the sell-off accelerated, credit started to lose ground fast and ended at its widest levels of the day in IG and HY (IG outperforming intrinsics but HY underperforming).

Breadth was evenly balanced today and low beta underperformed high beta among single-names and 3Y tended to underperform 5Y (even during the rally in the morning). Dispersion continues to rise but today's action looks increasingly like investors reaching for macro protection (overlays/hedges) in times of crisis, leaving their bonds/CDS in inventory a little longer.

IG is at its widest (on-the-run adjusted) since 5/28/09 today (and we note that the last time IG was here, HY was over 1000bps) - but different portfolios make the comps a little tricky. Across the broad universe of credit, 5Y was pretty much unch on aggregate as 3Y underperformed with APC, RIG, and HAL the worst performers on a DV01-adjusted basis (along with UAL and CONTI). No clear ratings-related theme today as cohorts were very mixed as we saw bond volumes low once again but underperforming where we did see them (smells like Monty Python's Holy Grail - investors bringing out the dead as markets show any appetite for risk). FINLs and Energy were the worst performing sectors by far today with Utilities and Capital Goods the best performers.

BP saw some very significant moves in all areas of the capital structure today - short dividend plays in option spreads, cparty hedging at the short-end of CDS curve, capital structure arb in CDS vs Puts and stock (as the stock vs CDS relationship swung close to fair today), basis trade compression and then huge decompression today (unwinding cash leg into a thin market => no fun at all), and ITRX-based correlation desk neg gamma management - overall serving to exaggerate moves up and down but bid-offers actually seemed to reflect some consistent selling pressure as opposed to panic (compared to APC for example). Not a pretty day at all.

Credit continues to point to more stress (whether CDS, cash, or short-term funding levels) and while directionally it is clear which way the trend is for now, equities remain stubborn for now - that buy-and-hold, buy-the-dip mentality did not help last time and with our views on the echo peaks in default rates that we have seen in previous cycles (and the avoidance of real pain in this cycle so far) leads us to worry about the levered cash bonds being held (why are insurers underperforming?) against macro overlays (in the hope that they can be unwound at a chosen time) - the vicious circle of hedge costs, collateral/margin calls, and mandate triggers are not likely to help.

One day to go til the greatest sporting event in the world (aside from my eldest daughter's U10 Soccer matches) and we have started to prepare ourselves - bets placed (in my home country of course or that would be illegal) and Fantasy Squad selected. Ennngggeeerrrrlaaannnddd.

Movers in Detail
Spreads were broadly wider in the US as all the indices deteriorated. IG trades 29.9bps wide (cheap) to its 50d moving average, which is a Z-Score of 1.8s.d.. At 132.5bps, IG has closed tighter on 251 days in the last 371 trading days (JAN09). The last five days have seen IG diverging from its 50d moving average. HY trades 75bps wide (cheap) to its 50d moving average, which is a Z-Score of 1.8s.d. and at 704.62bps, HY has closed tighter on 185 days in the last 371 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 outperformed pushing the skew wider, HY's skew widened as it underperformed. Comparing today's relative HY and IG moves to their 50-day rolling beta, we see that HY underperformed by around 1bps (or 7%).

Interestingly, based on short-run empirical betas between IG, HY, and the S&P, stocks outperformed HY by an equivalent 8.3bps (~ 58%), and stocks outperformed IG by an equivalent 1.9bps (~ 64%) - (implying IG underperformed HY (on an equity-adjusted basis)).

The names having the largest impact on IG are Freeport-McMoRan Copper & Gold Inc. (-7.5bps) pushing IG 0.06bps tighter, and Anadarko Petroleum Corp. (+221.1bps) adding 1.44bps to IG. HVOL is more sensitive with RR Donnelley & Sons Company pushing it 0.17bps tighter, and American Express Company contributing 0.31bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Freeport-McMoRan Copper & Gold Inc. (-7.5bps) pushing the index 0.08bps tighter, and Anadarko Petroleum Corp. (+221.1bps) adding 1.88bps to ExHVOL.

The price of investment grade credit fell 0.13% to around 98.6% of par, while the price of high yield credits fell 0.5% to around 92.38% of par. ABX market prices are higher (improving) by 0.02% of par or in absolute terms, 0.34%. Volatility (VIX) is up 0.03pts to 33.73%, with 10Y TSY rallying (yield falling) 1.1bps to 3.18% and the 2s10s curve steepened by 1.3bps, as the cost of protection on US Treasuries fell 4bps to 40.5bps. 2Y swap spreads tightened 0.6bps to 41.38bps, as the TED Spread widened by 1.6bps to 0.45% and Libor-OIS improved 0bps to 32.1bps.

The Dollar weakened with DXY falling 0.52% to 87.935, Oil rising $1.92 to $73.91 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 2.95% today (a 2.15% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $3.4 to $1233.15 as the S&P is down (1054.4 -0.45%) underperforming IG credits (132.5bps -0.13%) while IG, which opened tighter at 128.13bps, outperforms HY credits. IG13 and XOver13 are +1.5bps and -17bps respectively while ITRX13 is -4.31bps to 135.94bps.

Index/Intrinsics Changes
CDR LQD 50 NAIG +2.02bps to 116.99 (24 wider - 17 tighter <> 18 steeper - 32 flatter).

CDR Counterparty Risk Index fell 0.6bps (-0.33%) to 183.76bps (6 wider - 8 tighter).

CDR Government Risk Index fell 11.18bps (-8.87%) to 114.89bps..

CDX14 IG +2.5bps to 132 ($-0.1 to $98.62) (FV +2.91bps to 133.53) (47 wider - 54 tighter <> 54 steeper - 71 flatter) - Trend Wider.

CDX14 HVOL +2.5bps to 202.5 (FV +0.14bps to 0) (12 wider - 15 tighter <> 15 steeper - 15 flatter) - Trend Wider.

CDX14 ExHVOL +2.5bps to 109.74 (FV +3.75bps to 111.44) (35 wider - 60 tighter <> 56 steeper - 39 flatter).

CDX14 HY (30% recovery) Px $-0.5 to $92.38 / +14.3bps to 704.6 (FV -7.3bps to 648.12) (37 wider - 49 tighter <> 53 steeper - 46 flatter) - Trend Wider.

LCDX14 (70% recovery) Px $-0.25 to $93.88 / +7.63bps to 422.81 - Trend Wider.

MCDX14 0bps to 207.5bps. - Trend Wider.

ITRX13 Main -4.31bps to 135.94bps (FV-3.47bps to 140.08bps).

ITRX13 Xover -17bps to 612.5bps (FV-2.31bps to 607.06bps).

ITRX13 FINLs -12bps to 189bps (FV-10.24bps to 196.74bps).

DXY weakened 0.52% to 87.94.

Oil rose $1.92 to $73.91.

Gold fell $3.4 to $1233.15.

VIX increased 0.03pts to 33.73%.

10Y US Treasury yields fell 1.1bps to 3.18%.

S&P500 Futures lost 0.45% to 1054.4.

Single-Name Movers

The biggest absolute movers in IG were Anadarko Petroleum Corp. (+221.1bps), Transocean Ltd. (+119.82bps), and Quest Diagnostics Incorporated (+51.01bps) in the underperformers, and Freeport-McMoRan Copper & Gold Inc. (-11.25bps), American International Group, Inc. (-8.75bps), and RR Donnelley & Sons Company (-5.25bps) in the outperformers. The biggest percentage movers in IG were Quest Diagnostics Incorporated (+64.16%), Anadarko Petroleum Corp. (+49.83%), and Transocean Ltd. (+23.96%) in the underperformers, and United Parcel Service Inc. (-5.56%), Freeport-McMoRan Copper & Gold Inc. (-4.59%), and Ingersoll-Rand Company (-4.3%) in the outperformers.

In Main, the biggest percentage movers were BP PLC (+45.19%), Deutsche Bahn AG (+13.4%), and STMicroelectronics N.V. (+3.23%) in the underperformers, and Credit Agricole SA (-11.36%), BNP Paribas (-11%), and Banco Santander, S.A. (-10.9%) in the outperformers.The largest absolute movers in Main were BP PLC (+117.5bps), Deutsche Bahn AG (+8.86bps), and Aegon NV (+5bps) in the underperformers, and Glencore International AG (-39.11bps), Banco Santander, S.A. (-28.75bps), and Credit Agricole SA (-25bps) in the outperformers.

The biggest percentage movers in XOver were Societe Air France (+4.36%), Gecina SA (+3.64%), and International Power Plc (+3.08%) in the underperformers, and Nordic Telephone Company Holding ApS (-4.58%), GKN Holdings Plc (-3.64%), and Rallye S.A. (-3.23%) in the outperformers.The largest absolute movers in XOver were BCM Ireland Finance Ltd (+47.21bps), Societe Air France (+23.75bps), and Codere Finance SA (+23.46bps) in the underperformers, and Seat Pagine Gialle SpA (-57.13bps), Ineos Group Holdings plc (-25.08bps), and Rallye S.A. (-20.33bps) in the outperformers.

In the names of the HY index, the biggest percentage movers were RadioShack Corp (+3.05%), KB Home (+3.04%), and Textron Financial Corp (+3%) in the underperformers, and Dean Foods Co. (-39.36%), Nalco Company (-4.01%), and iStar Financial Inc. (-3.63%) in the outperformers. The largest absolute movers in HY were Level 3 Communications Inc. (+40.63bps), First Data Corp (+33.09bps), and Eastman Kodak Co. (+18.98bps) in the underperformers, and Dean Foods Co. (-522.52bps), Energy Future Holdings Corp. (-46.92bps), and iStar Financial Inc. (-43.68bps) in the outperformers.

The CDR Counterparty Risk Index Series 2 (of brokers and banks) fell -0.6bps (or -0.33%) to 183.76bps. Morgan Stanley (21.25bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Goldman Sachs Group Inc (8.09%) is the worst (relative) performer. BNP Paribas (-16.5bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and BNP Paribas (-11%) is the best (relative) performer.

The CDR Aussie Index rose 0.88bps (or 0.71%) to 124.91bps. Woodside Petroleum Limited (6.48bps) is the worst (absolute) performer, whilst Woodside Petroleum Limited (3.62%) is the worst (relative) performer. BHP Billiton Ltd (-3.35bps) is the best (absolute) performer, and BHP Billiton Ltd (-2.96%) is the best (relative) performer.

The CDR Asian Index rose 0.03bps (or 0.02%) to 136.67bps. POSCO (8.91bps) is the worst (absolute) performer, whilst POSCO (8.17%) is the worst (relative) performer. Promise Co Ltd (-16.31bps) is the best (absolute) performer, and Fujitsu Limited (-6.79%) is the best (relative) performer.