CDS Rerack: Equity Catching Up To Credit

While equity markets in the US have been hurt hard the last 24 hours, credit has been signaling notably more weakness than equities for a while. Today's action follows a similar path to Europe with equities underperforming credit and catching up to credit's view. Last night saw the credit indices close considerably cheap to their fair-value as investors grabbed index overlays as the most liquid hedges - today we some unwind of that as HY bonds are net sold and single-name CDS are decompressing considerably.

IG17 5Y is +5.75bps at 145.75bps but fair-value (single-name driven) is +8.5bps at 144.5bps (so clearly macro hedges have been unwound into micro hedges). HY16 3Y is +29bps while fair-value is +40bps reflecting a very similar pattern of rotation and that is helping credit appear to be outperforming equity on the day from the top-down - but realistically it is not pretty under the covers.

US Banks have been crushed with many showing inverted (or at best flat) curves:

BAC +35 at 405bps

C +25 at 285bps

JPM +12 at 157bps

WFC +11 at 155bps

GS +25 at 292bps

MS +38 at 397.5bps

Insurers are dramatically wider also (as their levered exposure to HY debt) with our mini-insurer index +15bps at 219bps.

Interestingly low beta credits are underperforming (which fits with rotation from macro to micro hedges) and we suspect this is simply a reflection of buying the cheapest protection available as opposed to reflective of creditworthiness among some of these names.

The Energy and TMT sectors are almost as weak as Financials with CONSumers outperforming overall but still notably wider.

Finally, in keeping with our theme today on sovereign risk, USA protection costs have spiked 7bps to 57.5bps - back to late July wides.



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