Daily Credit Summary: September 25 - UnPanic

Spreads pushed wider today with HY actually starting to shiver a little after holding its gains in the face of equity and IG weakness so far this week, as high beta names finally underperformed low beta. IG12 modestly underperformed IG13 once again as the tail names underperformed and HY underperformed IG. Breadth was more negative today in CDS land with wideners outpacing tighteners by around 7-to-1 and a noticeable flattening in the IG12 curve.

IG trades 6.1bps tight (rich) to its 50d moving average, which is a Z-Score of -0.8s.d. At 107.5bps, IG has closed tighter on only 11 days so far this year (192 trading days). The last five days have seen IG converging to its 50d moving average (and we note this would be the fourth test of the average during this downtrend). Indices generally outperformed intrinsics with skews widening in general as IG's skew widened as it underperformed, HVOL outperformed but narrowed the skew, ExHVOL's skew widened as it underperformed, XO's skew increased as the index outperformed, and HY outperformed but narrowed the skew.

Sovereign risk (EM underperforming Majors) was weak today as TSY 2s10s flattened, which is a slight aberration in recent weeks as all 14 members of the CDR counterparty risk index (CRI) were wider, moving the CRI up almost 5% to 97.5bps.

The names having the largest impact on IG are Boston Properties L.P. (-5.31bps) pushing IG 0.04bps tighter, and CIT Group Inc (+87.93bps) adding 0.41bps to IG. HVOL is more sensitive with Boston Properties L.P. pushing it 0.18bps tighter, and CIT Group Inc contributing 1.78bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Sherwin-Williams Company/The (-1.5bps) pushing the index 0.02bps tighter, and Textron Financial Corp (+12.5bps) adding 0.13bps to ExHVOL.

The price of investment grade credit fell 0.14% to around 99.68% of par, while the price of high yield credits fell 0.59% to around 94.41% of par. ABX market prices are lower by 0.06% of par or in absolute terms, 0.98%. Broadly speaking, CMBX market prices are higher (improving) by 0% of par or in absolute terms, 0%. Volatility (VIX) is up 0.66pts to 25.46%, with 10Y TSY rallying (yield falling) 6.1bps to 3.32% and the 2s10s curve flattened by 10.8bps, as the cost of protection on US Treasuries rose 1.5bps to 23bps. 2Y swap spreads widened 2.4bps to 31.81bps, as the TED Spread tightened by 0.3bps to 0.19% and Libor-OIS deteriorated 0.3bps to 11.9bps.

The Dollar weakened with DXY falling 0.17% to 76.768, Oil rising $0.14 to $66.03 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 0.66% today (a 0.04% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $4.4 to $989.7 as the S&P is down (1040 -0.41%) underperforming IG credits (107.75bps -0.14%) while IG, which opened wider at 104.5bps, outperforms HY credits. IG11 and XOver11 are +1.7bps and +10.25bps respectively while ITRX11 is +3.56bps to 86.5bps.

Dispersion rose +8.9bps 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 decreasing more than expected today indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads.

35% of IG credits are shifting by more than 3bps and 51% 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 4.75bps (one-week average 6.45bps), between low bid at 104 and high offer at 108.75 and higher beta credits (2.87%) underperformed lower beta credits (2.72%).

In IG, wideners outpaced tighteners by around 6-to-1, with 87 credits wider. By sector, CONS saw 68% names wider, ENRGs 56% names wider, FINLs 62% names wider, INDUs 64% names wider, and TMTs 96% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 89.75bps and the latter at 79.1bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 164.64bps from 155.73bps, but remains above the short-term average of 143.4bps, with the HY/XOver ratio rising to 1.34x, above its 5-day mean of 1.29x. The IG-Main spread compressed to 21.25bps from 21.31bps, but remains above the short-term average of 18.23bps, with the IG/Main ratio falling to 1.25x, above its 5-day mean of 1.22x.

In the US, non-financials outperformed financials as IG ExFINLs are wider by 2.4bps to 79.1bps, with 12 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 4.32bps to 97.29bps, with Brokers (worst) wider by 5.5bps to 127.58bps, Finance names (best) wider by 13.07bps to 634.96bps, and Banks wider by 4.36bps to 127.9bps. Monolines are trading wider on average by 83.32bps (2.28%) to 3143.38bps.

In IG, FINLs underperformed non-FINLs (3.09% wider to 3.07% wider respectively), with the former (IG FINLs) wider by 6.7bps to 222.1bps, with 6 of the 21 names tighter. The IG CDS market (as per CDX) is 21.9bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (85.83bps), with the bond ETFs underperforming the IG CDS market by around 0.17bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 3.82bps to 89.75bps (with ITRX FINLs -trending tighter- weaker by 2.5 to 73.5bps) and is currently trading at the wides of the week's range at 100%, between 89.75 to 82.56bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading at the wides of the week's range at 99.95%, between 66.42 to 58.49bps. ExHVOL outperformed LoVOL as the differential compressed to 6.96bps from 7.67bps, but remains above the short-term average of 3.43bps. The Main exFINLS to IG ExHVOL differential decompressed to 16.37bps from 15.86bps, but remains below the short-term average of 20.19bps.

On the week, we saw IG underperform HY and high beta outperform low beta quite generously (excluding roll-related moves). The roll passed relatively calmly (as we await next Tuesday's HY roll) although the huge compression in high beta names was probably not helped by rolling positions). The curve steepening and roll compression seen late last week and early this week was unable to be fully covered by the late week flattening and decompression but we do see IG13 outperforming IG12 (as we suggested) although HVOL12 outperformed HVOL13 from the open on Monday (thanks mainly to the high beta action) although as the week progressed these trends began to unwind. HY was tighter open-to-close this week as HY-IG compressed but our HY-IG over XOver-Main trade performed extremely well in the face of the volatility.

Commentary compliments of www.creditresearch.com

Index/Intrinsics Changes
CDR LQD 50 NAIG +2.55bps to 79.31 (37 wider - 4 tighter <> 14 steeper - 36 flatter).
CDX13 IG +3.25bps to 99.5 ($0.2 to $100.02) (FV +2.46bps to 92.14) (84 wider - 21 tighter <> 41 steeper - 81 flatter) - Trend Wider.
CDX13 HVOL +2bps to 182 (FV +4.99bps to 174.54) (18 wider - 8 tighter <> 11 steeper - 18 flatter) - Trend Tighter.
CDX13 ExHVOL +3.97bps to 73.45 (FV +1.68bps to 66.9) (66 wider - 29 tighter <> 65 steeper - 30 flatter).
CDX12 IG +3.75bps to 107.75 ($-0.14 to $99.68) (FV +3.08bps to 102.38) (87 wider - 18 tighter <> 39 steeper - 83 flatter) - Trend Wider.
CDX12 HVOL +4.1bps to 216.6 (FV +7.32bps to 215.6) (21 wider - 6 tighter <> 10 steeper - 20 flatter) - Trend Tighter.
CDX12 ExHVOL +3.31bps to 73.38 (FV +1.81bps to 68.41) (66 wider - 29 tighter <> 66 steeper - 29 flatter).
CDX11 XO +6.5bps to 261 (FV +12.46bps to 281.66) (28 wider - 4 tighter <> 8 steeper - 26 flatter) - Trend Tighter.
CDX12 HY (30% recovery) Px $-0.59 to $94.41 / +16.4bps to 648.7 (FV +25.56bps to 582.43) (86 wider - 6 tighter <> 15 steeper - 77 flatter) - No Trend.
LCDX12 (65% recovery) Px $-0.2 to $98.6 / +6.2bps to 542.69 - Trend Tighter.
MCDX12 +0.67bps to 93.67bps. - No Trend.
CDR Counterparty Risk Index rose 4.32bps (4.65%) to 97.29bps (14 wider - 0 tighter).
CDR Government Risk Index rose 1.13bps (2.68%) to 43.13bps..
DXY weakened 0.17% to 76.77.
Oil rose $0.14 to $66.03.
Gold fell $4.4 to $989.7.
VIX increased 0.66pts to 25.46%.
10Y US Treasury yields fell 6.1bps to 3.32%.
S&P500 Futures lost 0.41% to 1040.


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