Friday, May 1, 2009

Daily Credit Market Summary: May 1 - Derisking Is Back

Spreads were broadly wider in the US as all the indices deteriorated. Indices generally outperformed intrinsics (as we see high beta shorts selling index protection as hedges) 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's skew widened as it underperformed.

The names having the largest impact on IG are CIT Group Inc (-146.87bps) pushing IG 0.8bps tighter, and Hartford Financial Services Group (+44.73bps) adding 0.33bps to IG. HVOL is more sensitive with CIT Group Inc pushing it 3.67bps tighter, and Hartford Financial Services Group contributing 1.5bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Toll Brothers, Inc. (-10bps) pushing the index 0.1bps tighter, and Time Warner Cable Inc. (+13bps) adding 0.13bps to ExHVOL.

The price of investment grade credit fell 0.08% to around 97.22% of par, while the price of high yield credits fell 0.13% to around 79% of par. ABX market prices are higher (improving) by 0.13% of par or in absolute terms, 0.37%. Broadly speaking, CMBX market prices are lower by 0.46%. Volatility (VIX) is down 1.2pts to 35.31%, with 10Y TSY selling off (yield rising) 3.8bps to 3.16% and the 2s10s curve steepened by 3bps, as the cost of protection on US Treasuries fell 0.67bps to 38bps. 2Y swap spreads widened 1.9bps to 58.13bps, as the TED Spread tightened by 2.8bps to 0.86% and Libor-OIS improved 3.6bps to 78.7bps.

The Dollar weakened with DXY falling 0.05% to 84.572, Oil rising $2.16 to $53.28 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 4.47% today (a 4.18% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $2.07 to $886.13 as the S&P rallies (872.2 0.25%) outperforming IG credits (164.75bps -0.08%) while IG, which opened tighter at 161.25bps, outperforms HY credits. IG11 and XOver11 are +2.75bps and +5.88bps respectively while ITRX11 is +5.66bps to 143.5bps.

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 fell -5.4bps 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.

54% of IG credits are shifting by more than 3bps and 61% of the CDX universe are also shifting significantly (less than the 5 day average of 63%). The number of names wider than the index stayed at 43 as the day's range rose to 10bps (one-week average 9.35bps), between low bid at 159.5 and high offer at 169.5 and higher beta credits (3.36%) underperformed lower beta credits (3.04%) as we see derisking popular again.

In IG, wideners outpaced tighteners by around 5-to-1, with 100 credits wider. By sector, CONS saw 81% names wider, ENRGs 81% names wider, FINLs 62% names wider, INDUs 82% names wider, and TMTs 91% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 143bps and the latter at 131.83bps.

Cross Market, we are seeing the HY-XOver spread compressing to 335.35bps from 336.17bps, but remains below the short-term average of 390.64bps, with the HY/XOver ratio falling to 1.41x, below its 5-day mean of 1.47x. The IG-Main spread compressed to 21.25bps from 24.91bps, and remains below the short-term average of 24.06bps, with the IG/Main ratio falling to 1.15x, below its 5-day mean of 1.16x.

In the US, non-financials underperformed financials as IG ExFINLs are wider by 4.5bps to 131.8bps, with 12 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 3.65bps to 230.77bps, with Brokers (worst) wider by 5.75bps to 290.83bps, Finance names (best) tighter by 10.48bps to 943.32bps, and Banks wider by 5.21bps to 290.44bps. Monolines are trading wider on average by 122.55bps (3.77%) to 2846.33bps. In IG, FINLs outperformed non-FINLs (0.27% tighter to 3.56% wider respectively), with the former (IG FINLs) tighter by 1.2bps to 454.4bps, with 7 of the 21 names tighter. The IG CDS market (as per CDX) is 10.1bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (154.62bps), with the bond ETFs outperforming the IG CDS market by around 4.67bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 6.5bps to 143bps (with ITRX FINLs -trending tighter- weaker by 2.29 to 145.5bps) and is currently trading in the middle of the week's range at 44.64%, between 151.06 to 136.5bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading in the middle of the week's range at 48.94%, between 108.58 to 95.95bps. ExHVOL outperformed LoVOL as the differential compressed to -5.36bps from -0.23bps, and remains below the short-term average of -3.34bps. The Main exFINLS to IG ExHVOL differential decompressed to 46.22bps from 40.78bps, and remains above the short-term average of 45.33bps.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 +6.08bps to 223.67 (44 wider - 3 tighter <> 25 steeper - 24 flatter).

CDX12 IG +1.75bps to 164.5 ($-0.07 to $97.23) (FV +3.64bps to 181.43) (99 wider - 19 tighter <> 61 steeper - 63 flatter) - Trend Tighter.

CDX12 HVOL +5bps to 380 (FV +6.64bps to 489.37) (22 wider - 8 tighter <> 14 steeper - 16 flatter) - Trend Tighter.

CDX12 ExHVOL +0.72bps to 96.45 (FV +2.8bps to 100.2) (77 wider - 18 tighter <> 48 steeper - 47 flatter).

CDX11 XO +11.3bps to 377.7 (FV +14.93bps to 449.9) (27 wider - 4 tighter <> 9 steeper - 25 flatter) - Trend Tighter.

CDX12 HY (30% recovery) Px $-0.13 to $79 / +5.1bps to 1152.8 (FV +0.91bps to 1063.56) (56
wider - 38 tighter <> 42 steeper - 54 flatter) - Trend Tighter.

LCDX12 (65% recovery) Px $+0.1 to $77.5 / -6.87bps to 1087.05 - Trend Tighter.

MCDX12 +1.75bps to 193bps. - Trend Tighter.

CDR Counterparty Risk Index rose 3.65bps (1.61%) to 230.77bps (12 wider - 3 tighter).

CDR Government Risk Index fell 0.61bps (-0.9%) to 67.61bps.

DXY weakened 0.05% to 84.57.

Oil rose $2.16 to $53.28.

Gold fell $2.07 to $886.13.

VIX fell 1.2pts to 35.31%.

10Y US Treasury yields rose 3.8bps to 3.16%.

S&P500 Futures gained 0.25% to 872.2. Sphere: Related Content
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