Wednesday, July 15, 2009

Daily Credit Summary: July 15 - VIX Vacillation

Spreads were tighter in the US as all the indices improved (with HY outperforming IG even as IG saw its best close-to-close and open-to-close performance in over six weeks). Indices generally outperformed intrinsics with skews mostly narrower as IG's skew decompressed as the index beat intrinsics, HVOL underperformed but narrowed the skew, ExHVOL outperformed pushing the skew wider, XO underperformed but compressed the skew, and HY outperformed but narrowed the skew.

The names having the largest impact on IG are CIT Group Inc (-217.53bps) pushing IG 1.05bps tighter (CIT off its intraday tights by the close), and Textron Financial Corp (+8.32bps) adding 0.06bps to IG. HVOL is more sensitive with CIT Group Inc pushing it 4.71bps tighter, and Textron Financial Corp contributing 0.27bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Time Warner Cable Inc. (-24.5bps) pushing the index 0.25bps tighter, and Quest Diagnostics Incorporated (+2.37bps) adding 0.03bps to ExHVOL.

The price of investment grade credit rose 0.29% to around 98.73% of par (stalling at the 129bps recent swing tights), while the price of high yield credits rose 1.375% to around 85.38% of par. ABX market prices are higher (improving) by 0.27% of par or in absolute terms, 0.66%. Broadly speaking, CMBX market prices are higher (improving) by 0% of par or in absolute terms, 0%. Volatility (VIX) is up 0.85pts to 25.87%, with 10Y TSY selling off (yield rising) 15.3bps to 3.63% and the 2s10s curve steepened by 7.2bps, as the cost of protection on US Treasuries rose 1.08bps to 39bps. 2Y swap spreads widened 0.9bps to 45.94bps, as the TED Spread widened by 0.1bps to 0.34% and Libor-OIS improved 0.4bps to 31.4bps.

The Dollar weakened with DXY falling 0.99% to 79.387, Oil rising $2.22 to $61.74 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 2.24% today (a 2.74% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $13.5 to $939.2 as the S&P rallies (927.3 2.87%) outperforming IG credits (130.5bps 0.3% which we suspect reflects the rise in VIX dragging on spreads modestly) while IG, which opened tighter at 137bps, underperforms HY credits. IG11 and XOver11 are -7.14bps and -25.75bps respectively while ITRX11 is -5.62bps to 111.13bps.

Dispersion fell -15.8bps 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 69% of the CDX universe are also shifting significantly (more than the 5 day average of 49%). The number of names wider than the index stayed at 47 as the day's range rose to 8.5bps (one-week average 5.9bps), between low bid at 129 and high offer at 137.5 and higher beta credits (-4.08%) underperformed lower beta credits (-4.69%).

In IG, wideners were dramatically outpaced by tighteners at around 20-to-1, with only a handful of credits notably wider (but notably many single-names gapped tighter which felt more squeeze than buying pressure). By sector, CONS saw 5% names wider, ENRGs 0% names wider, FINLs 0% names wider, INDUs 7% names wider, and TMTs 0% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 111.66bps and the latter at 117.27bps.

Cross Market, we are seeing the HY-XOver spread compressing to 213.51bps from 234.87bps, and remains below the short-term average of 232.09bps, with the HY/XOver ratio falling to 1.3x, below its 5-day mean of 1.31x. The IG-Main spread compressed to 19.37bps from 20.75bps, and remains below the short-term average of 20.24bps, with the IG/Main ratio falling to 1.17x, above its 5-day mean of 1.17x.

In the US, non-financials underperformed financials as IG ExFINLs are tighter by 5.3bps to 117.3bps, with 99 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 6.98bps to 146.96bps, with Finance names (worst) tighter by 28.9bps to 773.38bps, Banks (best) tighter by 10.93bps to 193.72bps, and Brokers tighter by 8.25bps to 163.33bps. Monolines are trading tighter on average by -162.94bps (4.18%) to 2752.24bps.

In IG, FINLs outperformed non-FINLs (4.37% tighter to 4.29% tighter respectively), with the former (IG FINLs) tighter by 16.1bps to 352.8bps, with 19 of the 21 names tighter. The IG CDS market (as per CDX) is 27.2bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (103.28bps), with the bond ETFs underperforming the IG CDS market by around 1.16bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 5.28bps to 111.66bps (with ITRX FINLs -trending tighter- better by 7 to 109bps) and is currently trading tight to its week's range at 0%, between 126.69 to 111.66bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at 0.04%, between 89.67 to 79.43bps. ExHVOL outperformed LoVOL as the differential compressed to -9.72bps from -7.04bps, but remains below the short-term average of -6.31bps. The Main exFINLS to IG ExHVOL differential decompressed to 41.95bps from 41.18bps, but remains above the short-term average of 41.07bps.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -7.61bps to 166.81 (1 wider - 48 tighter <> 35 steeper - 14 flatter).
CDX12 IG -7bps to 130.5 ($0.29 to $98.73) (FV -6.94bps to 154.6) (4 wider - 118 tighter <> 88 steeper - 35 flatter) - Trend Tighter.
CDX12 HVOL -10bps to 323 (FV -17.5bps to 404.9) (1 wider - 28 tighter <> 26 steeper - 4 flatter) - No Trend.
CDX12 ExHVOL -6.05bps to 69.71 (FV -3.93bps to 83.99) (3 wider - 92 tighter <> 33 steeper - 62 flatter).
CDX11 XO -9.1bps to 366.4 (FV -13.13bps to 447.27) (2 wider - 30 tighter <> 27 steeper - 7 flatter) - Trend Tighter.
CDX12 HY (30% recovery) Px $+1.25 to $85.25 / -42.9bps to 932.5 (FV -38.29bps to 880.84) (3 wider - 88 tighter <> 80 steeper - 12 flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $+1.55 to $86.25 / -70.29bps to 705.67 - Trend Tighter.
MCDX12 -15bps to 185bps. - Trend Tighter.
CDR Counterparty Risk Index fell 6.36bps (-4.13%) to 147.59bps (0 wider - 14 tighter).
CDR Government Risk Index fell 2.32bps (-3.79%) to 58.91bps..
DXY weakened 0.99% to 79.39.
Oil rose $2.22 to $61.74.
Gold rose $13.5 to $939.2.
VIX increased 0.91pts to 25.88%.
10Y US Treasury yields rose 15.1bps to 3.63%.
S&P500 Futures gained 2.87% to 927.3.

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