Wednesday, May 27, 2009

Daily Credit Market Summary: May 7 - Wide Nights

Spreads were mixed in the US with IG worse, HVOL wider, ExHVOL weaker, XO stronger, and HY rallying (although all indices were well off their intraday tights and in fact closed at intraday wides). Indices typically underperformed single-names (although single-names seemed unable to keep up with index weakness in the afternoon) with skews widening in general as IG underperformed but narrowed the skew (IG’s skew is as narrow as we have seen in IG12), HVOL underperformed but narrowed the skew, ExHVOL's skew widened as it underperformed (ExHVOL is now cheap to intrinsics), 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 American International Group, Inc. (-145.24bps) pushing IG 0.64bps tighter, and Motorola Inc. (+5.5bps) adding 0.04bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 2.84bps tighter, and Motorola Inc. contributing 0.19bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both National Rural Utilities Cooperative Finance Corporation (-42bps) pushing the index 0.42bps tighter, and Loews Corporation (+3bps) adding 0.03bps to ExHVOL.

The price of investment grade credit fell 0.08% to around 98% of par, while the price of high yield credits rose 0.0575% to around 79.94% of par. ABX market prices are lower by 0.18% of par or in absolute terms, 1.11%. Broadly speaking, CMBX market prices are lower (improving) by 0.1% of par or in absolute terms, 0.1%. Volatility (VIX) is up 1.74pts to 32.36%, with 10Y TSY selling off (yield rising) 18.3bps to 3.73% and the 2s10s curve steepened by 12.9bps, as the cost of protection on US Treasuries fell 0.48bps to 43.5bps. 2Y swap spreads tightened 0.4bps to 44.13bps, as the TED Spread widened by 2.5bps to 0.52% and Libor-OIS deteriorated 1.2bps to 46.3bps.

The Dollar strengthened with DXY rising 0.54% to 80.519, Oil rising $0.72 to $63.17 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 1.35% today (a 1.69% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $1.85 to $950.15 as the S&P is down (891.4 -1.9%) underperforming IG credits (147bps -0.08%) while IG, which opened tighter at 144.5bps, underperforms HY credits. IG11 and XOver11 are -0.25bps and -7.22bps respectively while ITRX11 is -1bps to 121.5bps.

Dispersion fell -10.6bps 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.

Only 37% of IG credits are shifting by more than 3bps and 47% of the CDX universe are also shifting significantly (less than the 5 day average of 52%). The number of names wider than the index decreased by 1 to 40 as the day's range fell to 7.75bps (one-week average 8.9bps), between low bid at 140 and high offer at 147.75 and higher beta credits (-2.09%) outperformed lower beta credits (-1.16%).

In IG, wideners were outpaced by tighteners by around 3-to-2, with only 27 credits notably wider. By sector, CONS saw 24% names wider, ENRGs 13% names wider, FINLs 29% names wider, INDUs 14% names wider, and TMTs 26% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 121.75bps and the latter at 117.28bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 384.4bps from 379.38bps, but remains above the short-term average of 376.51bps, with the HY/XOver ratio rising to 1.52x, above its 5-day mean of 1.5x. The IG-Main spread decompressed to 25.5bps from 22.5bps, but remains above the short-term average of 21.97bps, with the IG/Main ratio rising to 1.21x, above its 5-day mean of 1.18x.

In the US, non-financials outperformed financials as IG ExFINLs are tighter by 2.2bps to 117.3bps, with 57 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 0.76bps to 150.21bps, with Banks (worst) tighter by 0.29bps to 181.54bps, Finance names (best) tighter by 18.27bps to 691.71bps, and Brokers tighter by 2.19bps to 182.7bps. Monolines are trading tighter on average by -42.82bps (2.04%) to 2504.59bps.

In IG, FINLs underperformed non-FINLs (1.89% tighter to 2.85% tighter respectively), with the former (IG FINLs) tighter by 7.6bps to 336.8bps, with 13 of the 21 names tighter. The IG CDS market (as per CDX) is 26.9bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (120.08bps), with the bond ETFs outperforming the IG CDS market by around 7.59bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) rallied 1.13bps to 121.75bps (with ITRX FINLs -trending wider- better by 0.5 to 120.5bps) and is currently trading tight to its week's range at 0%, between 128.81 to 121.75bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading tight to its week's range at 4.53%, between 86.93 to 82.29bps. ExHVOL underperformed LoVOL as the differential decompressed to 6.08bps from 3.57bps, but remains above the short-term average of 1.15bps. The Main exFINLS to IG ExHVOL differential compressed to 33.17bps from 36.5bps, but remains below the short-term average of 39.66bps.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -3.21bps to 172.08 (14 wider - 27 tighter <> 28 steeper - 21 flatter).

CDX12 IG +1.75bps to 146.75 ($-0.07 to $98.02) (FV -3.09bps to 152.16) (27 wider - 71 tighter <> 70 steeper - 53 flatter) - No Trend.

CDX12 HVOL +1.38bps to 332 (FV -7.72bps to 379.09) (5 wider - 21 tighter <> 17 steeper - 11 flatter) - Trend Tighter.

CDX12 ExHVOL +1.87bps to 88.25 (FV -1.76bps to 87.82) (22 wider - 73 tighter <> 42 steeper - 53 flatter).

CDX11 XO -1.5bps to 323.2 (FV +0.04bps to 417.62) (16 wider - 14 tighter <> 13 steeper - 21 flatter) - Trend Tighter.

CDX12 HY (30% recovery) Px $+0.06 to $79.9375 / -2.2bps to 1122.9 (FV -22.12bps to 991.93) (41 wider - 44 tighter <> 48 steeper - 45 flatter) - No Trend.

LCDX12 (65% recovery) Px $+0.37 to $80.85 / -23.08bps to 989.48 - Trend Tighter.

MCDX12 0bps to 180bps. - Trend Wider.

CDR Counterparty Risk Index fell 0.76bps (-0.51%) to 150.21bps (6 wider - 9 tighter).

CDR Government Risk Index rose 0.4bps (0.64%) to 62.96bps..

DXY strengthened 0.54% to 80.52.

Oil rose $0.72 to $63.17.

Gold fell $1.85 to $950.15.

VIX increased 1.74pts to 32.36%.

10Y US Treasury yields rose 18.5bps to 3.74%.

S&P500 Futures lost 1.9% to 891.4. Sphere: Related Content
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