Spreads were mixed in the US this week with IG worse, HVOL wider, ExHVOL weaker, XO wider, and HY rallying (HY outperformance of IG far greater than XOver compression to Main). Indices typically underperformed single-names with skews mostly narrower as IG underperformed but narrowed the skew (as index curve steepened dramatically relative to intrinsics - we worry that curve/roll trades are becoming overcrowded here - see IG9's short-end!), HVOL underperformed but narrowed 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 International Lease Finance Corp. (-114.44bps) pushing IG 0.76bps tighter, and FirstEnergy Corp (+45bps) adding 0.35bps to IG. HVOL is more sensitive with International Lease Finance Corp. pushing it 3.37bps tighter, and XL Capital Limited contributing 1.15bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Wells Fargo & Company (-16.25bps) pushing the index 0.17bps tighter, and FirstEnergy Corp (+45bps) adding 0.45bps to ExHVOL.
The price of investment grade credit fell 0.07% to around 99.06% of par (as cash dramatically outperformed synthetics on the week driving the basis to almpst zero in IG names), while the price of high yield credits rose 1.505% to around 86.01% of par (basis not nearly as compressed). ABX market prices are lower by 0.75% of par or in absolute terms, 1.88%. Broadly speaking, CMBX market prices are lower by 0.29% of par or in absolute terms, 0.1%. Volatility (VIX) is down 1.47pts to 28.15%, with 10Y TSY rallying (yield falling) 3.6bps to 3.8% and the 2s10s curve flattened by 0.8bps, as the cost of protection on US Treasuries rose 5.28bps to 44.875bps. 2Y swap spreads tightened 7.3bps to 41.75bps, as the TED Spread widened by 0.4bps to 0.46% and Libor-OIS deteriorated 2.6bps to 41.3bps.
The Dollar weakened with DXY falling 0.64% to 80.157, Oil rising $3.76 to $72.2 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 7.29% today (a 4.85% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $15.95 to $939.3 as the S&P rallies (944.7 0.45%) outperforming IG credits (122.09bps -0.07%) while IG, which opened tighter at 126.5bps, underperforms HY credits. IG11 and XOver11 are +3.09bps and +18.05bps respectively while ITRX11 is +6.1bps to 107.85bps.
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 -6.2bps 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.
50% of IG credits are shifting by more than 3bps and 39% of the CDX universe are also shifting significantly (less than the 5 day average of 46%). The number of names wider than the index decreased by 3 to 43 as the week's range fell to 12bps (one-month average 22bps), between low bid at 117.5 and high offer at 129.5 and higher beta credits (-1.45%) outperformed lower beta credits (-1.29%).
In IG, wideners were outpaced by tighteners by around 2-to-1, with only 41 credits notably wider on the week. By sector, CONS saw 22% names wider, ENRGs 25% names wider, FINLs 33% names wider, INDUs 43% names wider, and TMTs 43% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 107.88bps and the latter at 105.14bps.
Cross Market, we are seeing the HY-XOver spread compressing to 229.31bps from 298.57bps, and remains below the short-term average of 274.3bps, with the HY/XOver ratio falling to 1.34x, below its 5-day mean of 1.4x. The IG-Main spread compressed to 14.24bps from 18.38bps, and remains below the short-term average of 17.47bps, with the IG/Main ratio falling to 1.13x, below its 5-day mean of 1.16x.
In the US, non-financials underperformed financials as IG ExFINLs are tighter by 0.7bps to 105.1bps, with 60 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 3.89bps to 143.17bps, with Banks (worst) tighter by 8.04bps to 182.4bps, Brokers (best) tighter by 10.63bps to 168.33bps, and Finance names tighter by 29.9bps to 643.08bps. Monolines are trading tighter on average by -172.33bps (8.13%) to 2292.03bps.
In IG, FINLs outperformed non-FINLs (3.03% tighter to 0.68% tighter respectively), with the former (IG FINLs) tighter by 9.2bps to 292.9bps, with 14 of the 21 names tighter. The IG CDS market (as per CDX) is 26.3bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (95.95bps), with the bond ETFs outperforming the IG CDS market by around 5.01bps.
In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 6.51bps to 107.88bps (with ITRX FINLs -trading sideways- weaker by 4.48 to 107.75bps) and is currently trading at the wides of the week's range at 100%, between 107.88 to 101.37bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading at the wides of the week's range at 100.02%, between 72.31 to 66.37bps. ExHVOL outperformed LoVOL as the differential compressed to -0.65bps from 4.22bps, but remains below the short-term average of 4.31bps. The Main exFINLS to IG ExHVOL differential decompressed to 36.22bps from 30.78bps, and remains above the short-term average of 32.08bps.
Commentary compliments of www.creditresearch.com
Index/Intrinsics Changes (over the week)
CDR LQD 50 NAIG091 -7.92bps to 148.18 (9 wider - 36 tighter <> 36 steeper - 12 flatter).
CDX12 IG +1.96bps to 122.09 ($-0.07 to $99.06) (FV -2.3bps to 135.14) (43 wider - 74 tighter <> 75 steeper - 49 flatter) - No Trend.
CDX12 HVOL +4.78bps to 281.78 (FV -7.92bps to 331.82) (11 wider - 19 tighter <> 21 steeper - 9 flatter) - No Trend.
CDX12 ExHVOL +1.84bps to 72.43 (FV -0.7bps to 77.79) (32 wider - 63 tighter <> 41 steeper - 54 flatter).
CDX11 XO +0.9bps to 312.5 (FV +2.49bps to 393.58) (17 wider - 16 tighter <> 18 steeper - 16 flatter) - Trend Tighter.
CDX12 HY (30% recovery) Px $+1.5 to $86 / -51bps to 909.7 (FV -60.84bps to 853.87) (30 wider - 67 tighter <> 62 steeper - 35 flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $+0.28 to $84.555 / -12.78bps to 751.73 - Trend Tighter.
MCDX12 +7bps to 177bps. - No Trend.
CDR Counterparty Risk Index fell 3.47bps (-2.36%) to 143.59bps (4 wider - 10 tighter).
CDR Government Risk Index rose 3.32bps (5.45%) to 64.3bps.
DXY weakened 0.64% to 80.16.
Oil rose $3.76 to $72.2.
Gold fell $15.95 to $939.3.
VIX fell 1.47pts to 28.15%.
10Y US Treasury yields fell 3.6bps to 3.8%.
S&P500 Futures gained 0.45% to 944.7.
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