Monday, April 20, 2009

Daily Credit Market Summary: April 20 - All Skewed Up

Spreads were broadly wider in the US today as all the indices deteriorated. 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's skew widened as it underperformed, XO's skew increased as the index outperformed, and HY outperformed but narrowed the skew. Equities were already rich to credit before the start today and while equity fell today, the widening in CDS and increase in vol points to short-term weakness in equities – target S&P 812pts (TD: this is not a trade recommendation).

The names having the largest impact on IG are Constellation Energy Group Inc. (-5.83bps) pushing IG 0.04bps tighter, and International Lease Finance Corp. (+120.93bps) adding 0.7bps to IG. HVOL is more sensitive with ERP Operating LP pushing it 0.09bps tighter, and International Lease Finance Corp. contributing 3.22bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Constellation Energy Group Inc. (-5.83bps) pushing the index 0.06bps tighter, and Wells Fargo & Company (+28bps) adding 0.28bps to ExHVOL.

The price of investment grade credit fell 0.34% to around 96.26% of par, while the price of high yield credits fell 0.93% to around 74.63% of par. ABX market prices are lower by 0.03% of par or in absolute terms, 0.34%. Broadly speaking, CMBX market prices are lower by 0.09% of par or in absolute terms, 0.28%. Volatility (VIX) is up 5.47pts to 37.67%, with 10Y TSY rallying (yield falling) 11.3bps to 2.84% and the 2s10s curve flattened by 5.7bps, as the cost of protection on US Treasuries rose 1.82bps to 44bps. 2Y swap spreads widened 1bps to 61.25bps, as the TED Spread widened by 0.9bps to 0.98% and Libor-OIS improved 7.8bps to 82.8bps.

The Dollar strengthened with DXY rising 0.93% to 86.778, Oil falling $3.43 to $46.9 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 8.17% today (a 5.89% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $12.8 to $881.6 as the S&P is down (841.5 -2.92%) underperforming IG credits (187bps -0.35%) while IG, which opened wider at 181.5bps, outperforms HY credits. IG11 and XOver11 are +11bps and +33.08bps respectively while ITRX11 is +7.5bps to 155.5bps.

The majority of credit curves flattened as the vol term structure flattened with VIX/VIXV rising implying a more bullish/less volatile short-term outlook (normally indicative of short-term spread compression expectations).

Dispersion rose +17.9bps 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 decreasing more than expected today indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads.

75% of IG credits are shifting by more than 3bps and 75% of the CDX universe are also shifting significantly (more than the 5 day average of 68%). The number of names wider than the index stayed at 48 as the day's range rose to 9.5bps (one-week average 8.2bps), between low bid at 180.5 and high offer at 190 and higher beta credits (5.85%) underperformed lower beta credits (5.23%).

In IG, wideners outpaced tighteners by around 23-to-1, with 114 credits wider. By sector, CONS saw 92% names wider, ENRGs 88% names wider, FINLs 95% names wider, INDUs 93% names wider, and TMTs 87% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 155.13bps and the latter at 156.53bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 470.3bps from 463.8bps, but remains above the short-term average of 448.8bps, with the HY/XOver ratio falling to 1.55x, above its 5-day mean of 1.53x. The IG-Main spread decompressed to 31.5bps from 30.5bps, but remains above the short-term average of 25.19bps, with the IG/Main ratio falling to 1.2x, above its 5-day mean of 1.17x.

In the US, non-financials outperformed financials as IG ExFINLs are wider by 8.5bps to 156.5bps, with 4 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 20.34bps to 227.92bps, with Banks (worst) wider by 30.76bps to 295.81bps, Finance names (best) wider by 41.83bps to 957.26bps, and Brokers wider by 23.75bps to 272.2bps. Monolines are trading wider on average by 147.65bps (4.91%) to 2815.45bps.

In IG, FINLs underperformed non-FINLs (6.1% wider to 5.73% wider respectively), with the former (IG FINLs) wider by 26.8bps to 466bps, with 1 of the 21 names tighter. The IG CDS market (as per CDX) is 6bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (181.04bps), with the bond ETFs underperforming the IG CDS market by around 3.75bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 7.59bps to 155.13bps (with ITRX FINLs -trading sideways- weaker by 7.17 to 157bps) and is currently trading at the wides of the week's range at 100%, between 155.13 to 147.54bps, and is trading sideways. Main LoVOL (trend wider) is currently trading at the wides of the week's range at 100.06%, between 112.39 to 104.66bps. ExHVOL outperformed LoVOL as the differential compressed to 1.97bps from 2.14bps, but remains above the short-term average of -5.89bps. The Main exFINLS to IG ExHVOL differential decompressed to 40.76bps from 40.57bps, but remains below the short-term average of 51.5bps.

commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 +13.3bps to 242.98 (45 wider - 5 tighter <> 14 steeper - 36 flatter).

CDX12 IG +8.63bps to 187.125 ($-0.35 to $96.25) (FV +11.33bps to 204.44) (114 wider - 4 tighter <> 34 steeper - 90 flatter) - Trend Wider.

CDX12 HVOL +12bps to 417 (FV +30.63bps to 537.36) (30 wider - 0 tighter <> 5 steeper - 25 flatter) - Trend Tighter.

CDX12 ExHVOL +7.56bps to 114.53 (FV +6.01bps to 113.78) (84 wider - 11 tighter <> 63 steeper - 32 flatter).

CDX11 XO +9bps to 432.9 (FV +25.25bps to 504.99) (31 wider - 3 tighter <> 5 steeper - 29 flatter) - Trend Tighter.

CDX12 HY (30% recovery) Px $-0.93 to $74.63 / +39.6bps to 1326.8 (FV +52.58bps to 1178.31) (85 wider - 13 tighter <> 22 steeper - 77 flatter) - Trend Wider.

LCDX10 (55% recovery) Px $-1.75 to $74.75 / +127.51bps to 1469.18 - Trend Wider.

MCDX11 +4.5bps to 194.5bps. - Trend Tighter.

CDR Counterparty Risk Index rose 21.39bps (10.31%) to 228.97bps (15 wider - 0 tighter).

CDR Government Risk Index rose 1.86bps (2.76%) to 69.19bps.

DXY strengthened 0.93% to 86.78.

Oil fell $3.43 to $46.9.

Gold rose $12.8 to $881.6.

VIX increased 5.47pts to 37.67%.

10Y US Treasury yields fell 11.3bps to 2.84%.

S&P500 Futures lost 2.92% to 841.5. Sphere: Related Content
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