Thursday, June 4, 2009

Daily Credit Market Summary: June 4 - Divergence Deja Vu

Spreads were mixed in the US today as HY underperformed IG as credit rallied intraday but ended pretty much unch on the day. Indices generally outperformed intrinsics (single-names were generally wider) with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew, ExHVOL intrinsics beat and narrowed the skew, 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 Simon Property Group, L.P. (-15bps) pushing IG 0.12bps tighter, and International Lease Finance Corp. (+240.9bps) adding 1.51bps to IG. HVOL is more sensitive with Simon Property Group, L.P. pushing it 0.52bps tighter, and International Lease Finance Corp. contributing 6.7bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Barrick Gold Corp. (-7bps) pushing the index 0.07bps tighter, and Valero Energy Corp. (+17bps) adding 0.17bps to ExHVOL.

The price of investment grade credit rose 0.01% to around 99.02% of par, while the price of high yield credits fell 0.38% to around 83.5% of par. ABX market prices are lower by 0.22% of par or in absolute terms, 0.09%. Broadly speaking, CMBX market prices are lower by 1.08% of par or in absolute terms, 0.37%. Volatility (VIX) is down -0.84pts to 30.18%, with 10Y TSY selling off (yield rising) 17bps to 3.71% and the 2s10s curve steepened by 12.2bps, as the cost of protection on US Treasuries rose 0bps to 40bps. 2Y swap spreads widened 6.1bps to 47.25bps, as the TED Spread tightened by 2.3bps to 0.49% and Libor-OIS improved 1.6bps to 41bps.

The Dollar weakened with DXY falling 0.15% to 79.378, Oil rising $2.74 to $68.86 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 2.28% today (a 3.99% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $17.58 to $980.65 as the S&P rallies (940.8 0.98%) outperforming IG credits (123bps 0.01%) while IG, which opened wider at 123.5bps, outperforms HY credits. IG11 and XOver11 are -2.75bps and +1.75bps respectively while ITRX11 is -1.88bps to 107bps.

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 +19.6bps 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 increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.

Only 38% of IG credits are shifting by more than 3bps and 46% of the CDX universe are also shifting significantly (less than the 5 day average of 62%). The number of names wider than the index stayed at 46 as the day's range fell to 6bps (one-week average 7.13bps), between low bid at 121 and high offer at 127 and higher beta credits (2.62%) underperformed lower beta credits (0.93%).

In IG, wideners outpaced tighteners by around 2-to-1, with 62 credits wider. By sector, CONS saw 22% names wider, ENRGs 63% names wider, FINLs 76% names wider, INDUs 46% names wider, and TMTs 65% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 106.94bps and the latter at 106.48bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 305.95bps from 294.35bps, but remains below the short-term average of 311.41bps, with the HY/XOver ratio rising to 1.45x, above its 5-day mean of 1.45x. The IG-Main spread decompressed to 16bps from 14.37bps, but remains below the short-term average of 16.34bps, with the IG/Main ratio rising to 1.15x, above its 5-day mean of 1.14x.

In the US, non-financials outperformed financials as IG ExFINLs are wider by 0.9bps to 106.5bps, with 37 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 3.89bps to 148.24bps, with Finance names (worst) wider by 44.85bps to 688.24bps, Banks (best) wider by 3.09bps to 191.15bps, and Brokers wider by 3.75bps to 179.58bps. Monolines are trading wider on average by 31.66bps (0.81%) to 2380.48bps.

In IG, FINLs underperformed non-FINLs (7.96% wider to 0.85% wider respectively), with the former (IG FINLs) wider by 22.6bps to 306.6bps, with 3 of the 21 names tighter. The IG CDS market (as per CDX) is 19.9bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (103.15bps), with the bond ETFs outperforming the IG CDS market by around 7.68bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) rallied 2.57bps to 106.94bps (with ITRX FINLs -trending tighter- weaker by 0.87 to 107.25bps) and is currently trading tight to its week's range at 6.79%, 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%, between 86.91 to 71bps. ExHVOL underperformed LoVOL as the differential decompressed to 2.42bps from -0.83bps, but remains above the short-term average of -1.65bps. The Main exFINLS to IG ExHVOL differential compressed to 33.52bps from 37.34bps, and remains below the short-term average of 36.44bps.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -0.54bps to 157.35 (24 wider - 19 tighter <> 29 steeper - 16 flatter).

CDX12 IG 0bps to 123.25 ($0 to $99.01) (FV +4.12bps to 138.25) (61 wider - 37 tighter <> 50 steeper - 55 flatter) - Trend Tighter.

CDX12 HVOL -5bps to 280 (FV +15.62bps to 341.42) (18 wider - 8 tighter <> 11 steeper - 17 flatter) - Trend Tighter.

CDX12 ExHVOL +1.58bps to 73.75 (FV +0.77bps to 79.19) (43 wider - 52 tighter <> 56 steeper - 39 flatter).

CDX11 XO 0bps to 322.5 (FV +1.67bps to 391.91) (18 wider - 6 tighter <> 12 steeper - 14 flatter) - Trend Wider.

CDX12 HY (30% recovery) Px $-0.38 to $83.5 / +13.4bps to 993.2 (FV -2.24bps to 914.52) (42 wider - 38 tighter <> 39 steeper - 42 flatter) - Trend Tighter.

LCDX12 (65% recovery) Px $+0.13 to $83.75 / -6.39bps to 803.71 - Trend Tighter.

MCDX12 +9bps to 180bps. - No Trend.

CDR Counterparty Risk Index rose 3.47bps (2.4%) to 147.82bps (15 wider - 0 tighter).

CDR Government Risk Index rose 2.57bps (4.39%) to 61.11bps..

DXY weakened 0.15% to 79.38.

Oil rose $2.74 to $68.86.

Gold rose $17.58 to $980.65.

VIX fell 0.84pts to 30.18%.

10Y US Treasury yields rose 17bps to 3.71%.

S&P500 Futures gained 0.98% to 940.8. Sphere: Related Content
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