Creditresearch.com notes: Spreads were mixed to mostly wider in the US today with IG worse, HVOL wider, ExHVOL weaker, XO wider, and HY rallying. Indices generally outperformed intrinsics with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew, ExHVOL outperformed pushing the skew wider, XO's skew increased as the index outperformed, and HY outperformed but narrowed the skew.
The names having the largest impact on IG are International Lease Finance Corp. (-33.66bps) pushing IG 0.18bps tighter, and Textron Financial Corp (+89.45bps) adding 0.59bps to IG. HVOL is more sensitive with International Lease Finance Corp. pushing it 0.86bps tighter, and Textron Financial Corp contributing 2.82bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Dell Inc. (-7.5bps) pushing the index 0.08bps tighter, and Boeing Capital Corp (+35bps) adding 0.35bps to ExHVOL.
The price of investment grade credit fell 0.2% to around 95.58% of par, while the price of high yield credits rose 0.5% to around 68.88% of par. ABX market prices are lower by 0.53% of par or in absolute terms, 2.75%. Broadly speaking, CMBX market prices are lower by 0.09% of par or in absolute terms, 0.29%. Volatility (VIX) is down 1.86pts to 42.55%, with 10Y TSY rallying (yield falling) 1.7bps to 2.65% and the 2s10s curve flattened by 2.5bps, as the cost of protection on US Treasuries rose 2bps to 62bps. 2Y swap spreads were unch at 57.5bps, as the TED Spread tightened by 2.7bps to 0.96% and Libor-OIS improved 1.7bps to 95.7bps.
The Dollar strengthened with DXY rising 0.09% to 85.503, Oil falling $1.31 to $48.35 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 2.59% today (a 2.55% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $0.45 to $918.7 as the S&P rallies (809.1 1.8%) outperforming IG credits (202bps -0.21%) while IG, which opened wider at 198.5bps, underperforms HY credits. IG11 and XOver11 are +4.25bps and +13bps respectively while ITRX11 is +6bps to 178.5bps.
The majority of credit curves flattened as the vol term structure steepened with VIX/VIXV decreasing implying a more bearish/more volatile short-term outlook (normally indicative of short-term spread decompression expectations).
Dispersion rose +4.9bps 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.
64% of IG credits are shifting by more than 3bps and 69% of the CDX universe are also shifting significantly (more than the 5 day average of 62%). The number of names wider than the index stayed at 49 as the day's range fell to 9bps (one-week average 8.7bps), between low bid at 196.5 and high offer at 205.5 and higher beta credits (2.54%) outperformed lower beta credits (3.26%).
In IG, wideners outpaced tighteners by around 12-to-1, with 99 credits wider. By sector, CONS saw 84% names wider, ENRGs 88% names wider, FINLs 43% names wider, INDUs 93% names wider, and TMTs 83% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 177bps and the latter at 193.04bps.
Cross Market, we are seeing the HY-XOver spread compressing to 719.97bps from 760.53bps, but remains above the short-term average of 714.1bps, with the HY/XOver ratio falling to 1.75x, below its 5-day mean of 1.77x. The IG-Main spread compressed to 23.5bps from 24.5bps, but remains above the short-term average of 20.77bps, with the IG/Main ratio falling to 1.13x, above its 5-day mean of 1.12x.
In the US, non-financials underperformed financials as IG11 ExFINLs are wider by 7bps to 193bps, with 5 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 7.98bps to 273.33bps, with Banks (worst) wider by 9.64bps to 366.79bps, Finance names (best) tighter by 3.37bps to 1168.54bps, and Brokers wider by 5.63bps to 346.45bps. Monolines are trading tighter on average by -9.99bps (0.06%) to 2809.11bps.
In IG12, FINLs outperformed non-FINLs (0.86% wider to 3.77% wider respectively), with the former (IG11 FINLs) wider by 4.7bps to 555.8bps, with 3 of the 21 names tighter. The IG CDS market (as per CDX) is -15.9bps rich (we'd expect LQD to outperform TLH) to the LQD-TLH-implied valuation of investment grade credit (217.86bps), with the bond ETFs underperforming the IG CDS market by around 2.67bps.
In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 6.12bps to 177bps (with ITRX FINLs -trending wider- weaker by 5.5 to 184.5bps) and is currently trading at the wides of the week's range at 100%, between 177 to 161.25bps, and is trending wider. Main LoVOL (trend wider) is currently trading at the wides of the week's range at 100%, between 113.29 to 102.46bps. ExHVOL outperformed LoVOL as the differential compressed to 2.97bps from 6.82bps, but remains above the short-term average of -2.1bps. The Main exFINLS to IG ExHVOL differential decompressed to 60.74bps from 56.93bps, but remains below the short-term average of 63.69bps.
CDR LQD 50 NAIG091 +5.27bps to 295.15 (41 wider - 5 tighter <> 25 steeper - 25 flatter).
CDX12 IG +4.75bps to 201.75 ($-0.19 to $95.59) (FV +16.41bps to 238.4) (102 wider - 9 tighter <> 57 steeper - 68 flatter) - Trend Wider.
CDX12 HVOL +13.5bps to 473.5 (FV +16.55bps to 670.31) (25 wider - 2 tighter <> 17 steeper - 13 flatter) - Trend Wider.
CDX12 ExHVOL +1.99bps to 115.93 (FV +4.15bps to 137.37) (77 wider - 18 tighter <> 51 steeper - 44 flatter).
CDX11 XO +8.3bps to 565.3 (FV +15.26bps to 599.94) (27 wider - 4 tighter <> 18 steeper - 15 flatter) - Trend Wider.
CDX11 HY (30% recovery) Px $+0.5 to $68.88 / -27.6bps to 1679.5 (FV -19.47bps to 1325.35) (68 wider - 19 tighter <> 51 steeper - 45 flatter) - Trend Wider.
LCDX10 (55% recovery) Px $+0.04 to $73.04 / -3.43bps to 1601.74 - Trend Wider.
MCDX11 -0.25bps to 229.75bps. - No Trend.
CDR Counterparty Risk Index rose 7.78bps (2.93%) to 273.13bps (14 wider - 1 tighter).
CDR Government Risk Index rose 2.3bps (2.43%) to 96.7bps (6 wider - 1 tighter).
DXY strengthened 0.09% to 85.5.
Oil fell $1.25 to $48.41.
Gold fell $0.45 to $918.7.
VIX fell 1.86pts to 42.55%.
10Y US Treasury yields fell 0.9bps to 2.66%.
S&P500 Futures gained 1.65% to 807.9.
Compliments of www.creditresearch.com
For readers who ask about a cheat sheet for what all this gibberish means, here you go:
Paragraph 1 – Spreads wider implies credit markets are deteriorating. In order of creditworthiness the indices that we look at are ExHVOL, IG, HVOL, XO, and HY so understanding where weakness is relative to these levels of creditworthiness is useful to judge investors risk appetite. The intrinsics (which is simply the fair-value of the index) trades differently to the actual index and the difference is called the skew. Monitoring the skew and what is driving it tells investors whether pressure is coming from macro index players (among other players) or from single-name trends. It is not as easy to arb the index skew in credit but we note that if intrinsics trade wider than the index, there is some pressure for index spreads to deteriorate relative to the underlying single-names (and vice versa).
Paragraph 2 – the credits that had the largest positive and negative impact on the indices mentioned.
Paragraph 3 – Top-down breakdown of relative price changes in the IG (investment grade) and HY (high yield) markets and comparisons to more commonly discussed credit indicators.
Paragraph 4 – Cross asset class breakdown from the top-down. Compares gold, oil, equities, and European spreads (ITRX and XOver are the strong and weak credit worthiness indices for Europe).
Paragraph 5 – Insight into term structure changes in credit and how VIX term structures work with that to provide short-term trend indications.
Paragraph 6 – Dispersion is a measure of the distribution of risk in the credit markets. This dispersion tracks movements in the IG index and describes the dispersion (think standard deviation changes) to the index (think mean changes) and what it implies about traders views towards systemic sentiment (buy or sell it all) or idiosyncratic (name picking and pairs trades for example).
Paragraph 7 – Measures the relative activity of the day with number of names moving significantly, daily range relative to recent activity, and low and high beta performance (credit traders are interested in this as a signal for who/what is driving spread movements).
Paragraph 8 – Wideners and tighteners can be thought of as names that deteriorate and improve respectively and we track here what the advance-decline activity was on the day (just as with stocks). This can be thought of as a breadth indicator for the credit markets. The sector-by-sector breakdown of breadth is also provided as well as non-financial performance differential between Europe (ITRX Main exFINLS) and US (IG ExFINLs).
Paragraph 9 – measures the spread differential between the most risky (HY) and Crossover (XO) credits in the US and also between the best quality indices of the US (IG) and Europe (Main).
Paragraph 10 – non-financial versus financial performance and decomposition of the financial sector performance. The CDR Counterparty Risk index measures the risk of the largest OTC derivative counterparties (higher is more risky).
Paragraph 11 – Breaks down the IG index financial performance relative to non-financials (which is different as the financial members of the IG index have different weights than the broad financial universe). We also decompose the relationship between the investment grade credit market and the leading bond ETFs providing investors with insight into potential capital structure arbitrage (or more simply just trading around the ETFs).
Paragraph 12 – Discusses relative performance among the major European credit indices. ITRX Main ExFINLs is the investment grade index in Europe excluding the financial names. Main LoVOL is the investment grade index in Europe excluding the highest volatility names and represents the best quality CDS indices which are tradable.
Index/Intrinsics Changes should be self-evident – FV stands for Fair Value. As discussed above, if we see the index improve but FV deteriorate then it gives us important insight into what/who is driving credit market performance. Wider is weaker, tighter is stronger from a fundamental perspective. Steeper and flatter correspond to the term structures of risk and offer valuable perspective on whether it is the short-term or longer-term that is receiving or giving up risk.
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