Thursday, June 11, 2009

Daily Credit Market Summary: June 11 - Mixed Bag

Spreads were mixed in the US with IG worse (seeming to set a 120ish support level), HVOL improving, ExHVOL weaker, XO stronger, and HY rallying (seemed like traders followed intrinsics - selling IG and buying HY as IG is rich and HY cheap to intrinsics). Indices typically underperformed single-names with skews mostly narrower as IG underperformed but narrowed the skew, HVOL underperformed but narrowed the skew, ExHVOL's skew widened as it underperformed, XO underperformed but compressed the skew, and HY outperformed but narrowed the skew (and after an outside day yesterday, both IG and HY had inside days - wider tights and tighter wides - tending to signal more volatility to come).

The names having the largest impact on IG are CIT Group Inc (-36.24bps) pushing IG 0.21bps tighter, and Weyerhaeuser Co (+5bps) adding 0.04bps to IG. HVOL is more sensitive with CIT Group Inc pushing it 0.94bps tighter, and Motorola Inc. contributing 0.14bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both FirstEnergy Corp (-16.25bps) pushing the index 0.16bps tighter, and Weyerhaeuser Co (+5bps) adding 0.05bps to ExHVOL.

The price of investment grade credit fell 0.08% to around 98.87% of par, while the price of high yield credits rose 0.37% to around 84.75% of par. ABX market prices are lower by 0.04% of par or in absolute terms, 0.82%. Broadly speaking, CMBX market prices are higher (improving) by 0.01% of par or in absolute terms, 0.02%. Volatility (VIX) is down -0.35pts to 28.11%, with 10Y TSY rallying (yield falling) 9.2bps to 3.86% and the 2s10s curve flattened by 6bps, as the cost of protection on US Treasuries fell 0.07bps to 44.035bps. 2Y swap spreads tightened 1.2bps to 46.25bps, as the TED Spread tightened by 0.7bps to 0.46% and Libor-OIS improved 0.4bps to 40.9bps.

The Dollar weakened with DXY falling 1.02% to 79.51, Oil rising $1.07 to $72.4 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 1.51% today (a 0.48% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $0.07 to $954.42 as the S&P rallies (942.1 0.17%) outperforming IG credits (126.88bps -0.08%) while IG, which opened wider at 125.25bps, underperforms HY credits. IG11 and XOver11 are +1.75bps and +5.85bps respectively while ITRX11 is +2.32bps to 107.57bps.

The majority of credit curves steepened 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 fell -3.2bps 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 increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.

Only 24% of IG credits are shifting by more than 3bps (this is very low!) and 41% of the CDX universe are also shifting significantly (less than the 5 day average of 48%). The number of names wider than the index stayed at 41 as the day's range fell to 8.5bps (one-week average 8.73bps), between low bid at 120.25 and high offer at 128.75 and higher beta credits (-0.92%) outperformed lower beta credits (-0.82%).

In IG, wideners were outpaced by tighteners by around 2-to-1, with 36 credits notably wider. By sector, CONS saw 24% names wider, ENRGs 31% names wider, FINLs 14% names wider, INDUs 46% names wider, and TMTs 26% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 107.6bps and the latter at 104.61bps.

Cross Market, we are seeing the HY-XOver spread compressing to 273.28bps from 292bps, and remains below the short-term average of 289.17bps, with the HY/XOver ratio falling to 1.4x, below its 5-day mean of 1.43x. The IG-Main spread compressed to 19.31bps from 19.75bps, but remains above the short-term average of 17.66bps, with the IG/Main ratio falling to 1.18x, above its 5-day mean of 1.17x.

In the US, non-financials underperformed financials as IG ExFINLs are tighter by 0.6bps to 104.6bps, with 54 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 1.07bps to 142.44bps, with Brokers (worst) tighter by 1.25bps to 169.58bps, Finance names (best) tighter by 18.79bps to 635.23bps, and Banks tighter by 2.64bps to 181.97bps. Monolines are trading wider on average by 13.52bps (0.2%) to 2341.07bps.

In IG, FINLs outperformed non-FINLs (1.95% tighter to 0.54% tighter respectively), with the former (IG FINLs) tighter by 5.7bps to 289.7bps, with 16 of the 21 names tighter. The IG CDS market (as per CDX) is 30.9bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (95.95bps), with the bond ETFs underperforming the IG CDS market by around 0.97bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 2.1bps to 107.6bps (with ITRX FINLs -trading sideways- weaker by 3.2 to 107.45bps) and is currently trading at the wides of the week's range at 96.74%, between 107.81 to 101.37bps, and is trending wider. Main LoVOL (sideways trading) is currently trading at the wides of the week's range at 99.99%, between 71.04 to 66.37bps. ExHVOL underperformed LoVOL as the differential decompressed to 6.5bps from 5.93bps, but remains above the short-term average of 4.73bps. The Main exFINLS to IG ExHVOL differential compressed to 30.06bps from 31.03bps, but remains below the short-term average of 31.76bps.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -2.56bps to 147.76 (11 wider - 30 tighter <> 30 steeper - 19 flatter).

CDX12 IG +1.88bps to 126.88 ($-0.08 to $98.87) (FV -1.4bps to 134.37) (36 wider - 70 tighter <> 70 steeper - 55 flatter) - Trend Wider.

CDX12 HVOL -1.88bps to 283.12 (FV -4.46bps to 329.2) (8 wider - 22 tighter <> 18 steeper - 12 flatter) - Trend Wider.

CDX12 ExHVOL +3.07bps to 77.54 (FV -0.5bps to 77.51) (28 wider - 67 tighter <> 43 steeper - 52 flatter).

CDX11 XO -0.9bps to 313.7 (FV -2.38bps to 393.43) (12 wider - 20 tighter <> 20 steeper - 14 flatter) - No Trend.

CDX12 HY (30% recovery) Px $+0.37 to $84.75 / -12.9bps to 953.6 (FV -8.61bps to 856.06) (36 wider - 54 tighter <> 51 steeper - 40 flatter) - Trend Tighter.

LCDX12 (65% recovery) Px $+0.1 to $84.4 / -4.77bps to 768.52 - No Trend.

MCDX12 +5bps to 177bps. - Trend Wider (missed auction in Alabama).

CDR Counterparty Risk Index rose 1.07bps (0.76%) to 142.44bps (11 wider - 3 tighter).

CDR Government Risk Index rose 0.79bps (1.26%) to 63.78bps.

DXY weakened 1.02% to 79.51.

Oil rose $1.07 to $72.4.

Gold fell $0.07 to $954.42.

VIX fell 0.35pts to 28.11%.

10Y US Treasury yields fell 9.2bps to 3.86%.

S&P500 Futures gained 0.17% to 942.1. Sphere: Related Content
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