CDS Rerack: Risk, It's Back!

As S&P futures head back towards their lows, they remain notably above commensurate credit-inferred levels as the credit and TSY complex is showing stresses far more than equities so far (and we know how that has ended recently). Europe is very ugly again with the major credit indices all significantly wider. Financials are losing grip on any hope as we now start to see not just PIIGS spreads widening but the core spreads crack as risk transfer is priced into the overall euro-area balance sheet. Non-financial European corps are also notably weaker as transmission mechanisms drag the real economy down and that is implicitly crossing the pond to drag IG and HY spreads wider over here.

Chart: Bloomberg

While CDS roll tomorrow and the new credit indices begin trading, we expect to see some more volatility in credit. Typically skews (the difference between index levels and their intrinsic value) will compress into the roll and while we are seeing that to some extent in IG and Main, HY (which does not roll for another week) is notably underperforming at the index level (macro overlays come back as once again cash liquidity dries up).

Main +10 to 186bps

XOver +35 to 749bps

Main ExFINs +7 to 162bps

SENFIN +25 to 287bps

SUBFIN +36 to 493bps

Worst FINLs (DV01 adjusted)

Intesa Sanpaolo +35 to 425bps

Banca Monte dei Paschi di Siena +45 to 530bps

Banco Popolare +40 to 680bps

Unicredit +30 to 450bps

Banco Bilbao Vizcaya Argentaria +25 to 325bps


SovX +16 to 330bps

Germany +6 to 89bps (most above 2Y Bunds ever!)

France +18 to 181.5bps

Portugal  +60 to 1105bps

Italy +35 to 487bps

Ireland +12 to 810bps

Greece +90 to 3085bps

Spain +34 to 404bps


IG +3.5bps to 129bps

HY +25bps to 695bps


Oil just broke $86, Copper $380.

TSYs 7-9bps lower in yield since Friday and 2s10s30s -10bps at 54bps (notably lower and in our view seeing QE3's (Twist) reflexive benefits dragging ES performance down from the carry-driven perspective).

EUR getting close to 1.36 with DXY back to last Wednesday's highs.

ES is opening the day session -23bps but looks to test VWAP at 1192 before resuming its drop.