Wednesday, June 3, 2009

Daily Credit Market Summary: June 3 - High Anxiety

Spreads were broadly wider in the US as all the indices deteriorated (with the late day craziness in stocks causing credit indices to rally modestly but liquidity dried up significantly). Indices generally outperformed intrinsics (as single-names ‘ignored’ the late equity strength) with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew (major decompression potentially signaling some index arb unwinds), 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 American International Group, Inc. (-159.55bps – now 1000bps tighter since 5/26 as we suspect major rerisking from counterparties lifting hedges) pushing IG 0.88bps tighter, and CIT Group Inc (+158.88bps) adding 0.94bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 3.87bps tighter, and CIT Group Inc contributing 4.14bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both XTO Energy Inc (-16.75bps) pushing the index 0.18bps tighter, and Wells Fargo & Company (+19.5bps) adding 0.2bps to ExHVOL.

The price of investment grade credit fell 0.1% to around 98.94% of par, while the price of high yield credits fell 1.38% to around 83.5% of par. ABX market prices are lower by 0.14% of par or in absolute terms, 1.52%. Broadly speaking, CMBX market prices are lower by 1% of par or in absolute terms, 0.32%. Volatility (VIX) is up 1.39pts to 31.02%, with 10Y TSY rallying (yield falling) 7.3bps to 3.54% and the 2s10s curve flattened by 3.4bps, as the cost of protection on US Treasuries rose 0bps to 40bps. 2Y swap spreads tightened 2.6bps to 41.38bps, as the TED Spread tightened by 1bps to 0.51% and Libor-OIS improved 1.7bps to 42.9bps.

The Dollar strengthened with DXY rising 1.32% to 79.442, Oil falling $2.42 to $66.13 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 1.69% today (a 2.21% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $18.35 to $963.5 as the S&P is down (931.7 -1.16%) underperforming IG credits (124.75bps -0.1%) while IG, which opened wider at 125bps, outperforms HY credits. IG11 and XOver11 are +2.25bps and +23.75bps respectively while ITRX11 is +3.75bps to 109bps.

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 rose 1.2bps 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.

70% of IG credits are shifting by more than 3bps and 68% of the CDX universe are also shifting significantly (more than the 5 day average of 62%). The number of names wider than the index increased by 4 to 45 as the day's range fell to 5.5bps (one-week average 7.05bps), between low bid at 123.5 and high offer at 129 and higher beta credits (5.99%) underperformed lower beta credits (5.79%).

In IG, wideners outpaced tighteners by around 7-to-1, with 100 credits notably wider. By sector, CONS saw 73% names wider, ENRGs 44% names wider, FINLs 86% names wider, INDUs 96% names wider, and TMTs 91% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 109.63bps and the latter at 105.83bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 305.8bps from 281.86bps, but remains below the short-term average of 326.76bps, with the HY/XOver ratio rising to 1.45x, below its 5-day mean of 1.46x. The IG-Main spread compressed to 15.75bps from 17bps, but remains below the short-term average of 18.18bps, with the IG/Main ratio falling to 1.14x, below its 5-day mean of 1.16x.

In the US, non-financials underperformed financials as IG ExFINLs are wider by 5.5bps to 105.8bps, with 12 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 9.96bps to 143.36bps, with Brokers (worst) wider by 16.38bps to 174.08bps, Finance names (best) wider by 39.8bps to 646.86bps, and Banks wider by 16.18bps to 187.33bps. Monolines are trading wider on average by 125.22bps (5.49%) to 2350.09bps.

In IG, FINLs outperformed non-FINLs (4.88% wider to 5.46% wider respectively), with the former (IG FINLs) wider by 13.5bps to 290.7bps, with 2 of the 21 names tighter (and we note that ENRG credits outperformed dramatically today on average as CONSumers, TMT, and INDUstrials underperformed). The IG CDS market (as per CDX) is 13.7bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (111.07bps), with the bond ETFs outperforming the IG CDS market by around 0.87bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 4bps to 109.63bps (with ITRX FINLs -trending tighter- weaker by 2.75 to 106.5bps) and is currently trading tight to its week's range at 20.74%, between 124.92 to 105.63bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at -0.02%, between 86.91 to 73.16bps. ExHVOL underperformed LoVOL as the differential decompressed to 4.14bps from 0.42bps, but remains above the short-term average of -0.18bps. The Main exFINLS to IG ExHVOL differential decompressed to 32.33bps from 30.99bps, but remains below the short-term average of 35.52bps.

Summary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 +9.65bps to 156.92 (41 wider - 5 tighter <> 11 steeper - 37 flatter).

CDX12 IG +2.5bps to 124.75 ($-0.1 to $98.94) (FV +6.77bps to 135.56) (100 wider - 14 tighter <> 36 steeper - 83 flatter) - Trend Tighter.

CDX12 HVOL +2bps to 275 (FV +16.92bps to 329.25) (27 wider - 3 tighter <> 5 steeper - 25 flatter) - Trend Tighter.

CDX12 ExHVOL +2.66bps to 77.3 (FV +3.8bps to 78.99) (73 wider - 22 tighter <> 64 steeper - 31 flatter).

CDX11 XO +6.4bps to 322.5 (FV +9.73bps to 390.28) (26 wider - 5 tighter <> 7 steeper - 24 flatter) - No Trend.

CDX12 HY (30% recovery) Px $-1.38 to $83.5 / +47.7bps to 991.3 (FV +15.94bps to 915.54) (61 wider - 25 tighter <> 31 steeper - 56 flatter) - Trend Tighter.

LCDX12 (65% recovery) Px $-0.8 to $83.9 / +38.43bps to 808.1 - Trend Tighter.
MCDX12 +1bps to 171bps. - Trend Tighter.

CDR Counterparty Risk Index rose 9.96bps (7.47%) to 143.36bps (13 wider - 2 tighter).

CDR Government Risk Index rose 1.07bps (1.86%) to 58.75bps.

DXY strengthened 1.32% to 79.44.

Oil fell $2.42 to $66.13.

Gold fell $18.35 to $963.5.

VIX increased 1.39pts to 31.02%.

10Y US Treasury yields fell 7.3bps to 3.54%.

S&P500 Futures lost 1.16% to 931.7. Sphere: Related Content
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