Friday, May 8, 2009

Daily Credit Market Summary: May 8 - All Not Rosy

Spreads were mixed in the US with IG tighter, HVOL improving, ExHVOL weaker, XO wider, and HY rallying (although IG decompressed most of the day). 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 (seems like single-name shorts being placed with HVOL hedge), ExHVOL's skew widened as it underperformed, XO's skew increased as the index outperformed, and HY outperformed but narrowed the skew.

32% of names in IG moved more than their historical vol would imply as higher vol names outperformed lower vol names by 0.68% to 1.86%. IG's vol is around 4.38% per 1 day period, which leaves 98 names higher vol and 27 lower vol than the index.

The names having the largest impact on IG are Textron Financial Corp (-57.13bps) pushing IG 0.43bps tighter, and Macy's, Inc. (+35bps) adding 0.27bps to IG. HVOL is more sensitive with Textron Financial Corp pushing it 1.93bps tighter, and Macy's, Inc. contributing 1.19bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Wells Fargo & Company (-32.5bps) pushing the index 0.34bps tighter, and Kohl's Corporation (+11bps) adding 0.11bps to ExHVOL.

The price of investment grade credit rose 0.14% to around 98.14% of par, while the price of high yield credits rose 0.62% to around 82.25% of par. ABX market prices are higher (improving) by 0.24% of par or in absolute terms, 0.35%. Broadly speaking, CMBX market prices are lower by 1.43% of par. Volatility (VIX) is down 1.49pts to 31.92%, with 10Y TSY rallying (yield falling) 5.2bps to 3.29% and the 2s10s curve flattened by 2.8bps, as the cost of protection on US Treasuries fell 2bps to 27bps. 2Y swap spreads widened 1.3bps to 46.25bps, as the TED Spread tightened by 1bps to 0.77% and Libor-OIS improved 0.7bps to 74bps.

The Dollar weakened with DXY falling 1.68% to 82.529, Oil rising $1.81 to $58.52 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 2.67% today (a 1.51% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $4.65 to $915.35 as the S&P rallies (922.8 1.74%) outperforming IG credits (143bps 0.14%) while IG, which opened tighter at 140.5bps, underperforms HY credits. IG11 and XOver11 are -2.25bps and +5.5bps respectively while ITRX11 is -0.5bps to 124bps.

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 10.2bps 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.

49% of IG credits are shifting by more than 3bps and 40% of the CDX universe are also shifting significantly (less than the 5 day average of 57%). The number of names wider than the index stayed at 39 as the day's range fell to 12.25bps (one-week average 11.85bps), between low bid at 135 and high offer at 147.25 and higher beta credits (0.21%) outperformed lower beta credits (1.29%).

In IG, wideners outpaced tighteners by around 3-to-2, with 60 credits wider. By sector, CONS saw 78% names wider, ENRGs 19% names wider, FINLs 10% names wider, INDUs 46% names wider, and TMTs 57% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 124.94bps and the latter at 114.57bps.

Cross Market, we are seeing the HY-XOver spread compressing to 291.21bps from 319.03bps, and remains below the short-term average of 316.26bps, with the HY/XOver ratio falling to 1.39x, below its 5-day mean of 1.41x. The IG-Main spread compressed to 19bps from 21.63bps, but remains above the short-term average of 18.26bps, with the IG/Main ratio falling to 1.15x, above its 5-day mean of 1.14x.

In the US, non-financials underperformed financials as IG ExFINLs are wider by 1bps to 114.6bps, with 30 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 17.82bps to 159.82bps, with Finance names (worst) tighter by 24.08bps to 774.69bps, Brokers (best) tighter by 25bps to 207.08bps, and Banks tighter by 20.93bps to 196.37bps. Monolines are trading tighter on average by -94.24bps (3.31%) to 2295.75bps.

In IG, FINLs outperformed non-FINLs (3.3% tighter to 0.88% wider respectively), with the former (IG FINLs) tighter by 12.3bps to 359.9bps, with 13 of the 21 names tighter. The IG CDS market (as per CDX) is 0.7bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (142.3bps), with the bond ETFs underperforming the IG CDS market by around 0.32bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 0.03bps to 124.94bps (with ITRX FINLs -trending tighter- better by 2.38 to 120.25bps) and is currently trading tight to its week's range at 0%, between 143.04 to 124.94bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at 0.01%, between 102.21 to 91.63bps. ExHVOL underperformed LoVOL as the differential decompressed to -2.16bps from -5.8bps, but remains above the short-term average of -7.71bps.

The Main exFINLS to IG ExHVOL differential compressed to 35.47bps from 38.8bps, but remains below the short-term average of 44.56bps.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -6.28bps to 179.72 (27 wider - 18 tighter <> 17 steeper - 29 flatter).
CDX12 IG -3.13bps to 143 ($0.14 to $98.14) (FV -1.1bps to 153.32) (60 wider - 43 tighter <> 49 steeper - 58 flatter) - Trend Tighter.
CDX12 HVOL -23.5bps to 312.5 (FV -7.66bps to 384.24) (10 wider - 17 tighter <> 13 steeper - 15 flatter) - Trend Tighter.
CDX12 ExHVOL +3.3bps to 89.47 (FV +0.79bps to 87.38) (50 wider - 45 tighter <> 59 steeper - 36 flatter).
CDX11 XO 0bps to 343.9 (FV +5.55bps to 397.08) (19 wider - 8 tighter <> 8 steeper - 20 flatter) - Trend Tighter.
CDX12 HY (30% recovery) Px $+0.62 to $82.25 / -22.3bps to 1032.2 (FV +7.91bps to 948.19) (59 wider - 27 tighter <> 34 steeper - 53 flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $+0.55 to $80.4 / -32.62bps to 948.38 - Trend Tighter.
MCDX12 -4bps to 160bps. - Trend Tighter.
CDR Counterparty Risk Index fell 17.82bps (-10.03%) to 159.82bps (0 wider - 15 tighter).
CDR Government Risk Index fell 4.86bps (-9.45%) to 46.54bps.
DXY weakened 1.68% to 82.53.
Oil rose $1.81 to $58.52.
Gold rose $4.65 to $915.35. VIX fell 1.39pts to 31.92%.
10Y US Treasury yields fell 5.6bps to 3.29%.
S&P500 Futures gained 1.74% to 922.8.

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