Tuesday, April 21, 2009

Daily Credit Market Summary: April 20 - Differentiation

Spreads were mostly wider in the US today (diverging from equity markets once again) with IG worse, HVOL wider, ExHVOL better, XO wider, and HY selling off. Indices generally outperformed intrinsics (seems like single-name shorts being put on with index long hedges) with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew, ExHVOL outperformed pushing the skew wider, XO's skew increased as the index outperformed, and HY outperformed but narrowed the skew.

The names having the largest impact on IG are Dell Inc. (-5bps) pushing IG 0.04bps tighter, and American International Group, Inc. (+242.52bps) adding 1.05bps to IG. HVOL is more sensitive with JC Penney Co. pushing it 0.09bps tighter, and American International Group, Inc. contributing 4.89bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Dell Inc. (-5bps) pushing the index 0.05bps tighter, and National Rural Utilities Cooperative Finance Corporation (+18.75bps) adding 0.18bps to ExHVOL.

The price of investment grade credit fell 0.07% to around 96.19% of par, while the price of high yield credits fell 0.5% to around 74.13% of par. ABX market prices are lower by 0.02% of par or in absolute terms, 0.24%. Broadly speaking, CMBX market prices are higher (improving) by 0.04% of par or in absolute terms, 0.13%. Volatility (VIX) is down -2.04pts to 37.14%, with 10Y TSY selling off (yield rising) 5.9bps to 2.9% and the 2s10s curve steepened by 3.5bps, as the cost of protection on US Treasuries rose 1.36bps to 46bps. 2Y swap spreads widened 4.4bps to 66.88bps, as the TED Spread tightened by -1.7bps to 0.96% and Libor-OIS deteriorated 0.2bps to 90.5bps.

The Dollar weakened with DXY falling 0.07% to 86.579, Oil rising $0.63 to $46.51 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 1.49% today (a 1.3% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $1.04 to $883.46 as the S&P rallies (847.7 1.78%) outperforming IG credits (188.75bps -0.08%) while IG, which opened wider at 187.75bps, outperforms HY credits. IG11 and XOver11 are +2.75bps and +12.52bps respectively while ITRX11 is +2.12bps to 157.5bps.

The majority of credit curves steepened 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 +23.5bps in IG (significant differentiation occurring in credit). 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.

59% of IG credits are shifting by more than 3bps and 72% of the CDX universe are also shifting significantly (more than the 5 day average of 69%). The number of names wider than the index decreased by 1 to 48 as the day's range fell to 8.75bps (one-week average 8.35bps), between low bid at 186.75 and high offer at 195.5 and higher beta credits (3.35%) underperformed lower beta credits (2.71%).

In IG, wideners outpaced tighteners by around 7-to-1, with 96 credits wider. By sector, CONS saw 68% names wider, ENRGs 69% names wider, FINLs 86% names wider, INDUs 89% names wider, and TMTs 74% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 157.38bps and the latter at 160.8bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 481.05bps from 471.82bps, but remains above the short-term average of 462.14bps, with the HY/XOver ratio rising to 1.55x, above its 5-day mean of 1.54x. The IG-Main spread compressed to 31.25bps from 31.5bps, but remains above the short-term average of 27.47bps, with the IG/Main ratio falling to 1.2x, above its 5-day mean of 1.18x.

In the US, non-financials outperformed financials as IG ExFINLs are wider by 4.4bps to 160.8bps, with 11 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 6.13bps to 235.07bps, with Finance names (worst) wider by 54.05bps to 1008.11bps, Brokers (best) wider by 3.25bps to 279.08bps, and Banks wider by 5.04bps to 302.13bps. Monolines are trading tighter on average by -29.95bps (0.91%) to 2790.19bps.

In IG, FINLs underperformed non-FINLs (5.63% wider to 2.78% wider respectively), with the former (IG FINLs) wider by 25.8bps to 483.5bps, with 2 of the 21 names tighter. The IG CDS market (as per CDX) is 15bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (173.78bps), with the bond ETFs outperforming the IG CDS market by around 6.32bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 2.19bps to 157.38bps (with ITRX FINLs -trending wider- weaker by 1.86 to 158bps) and is currently trading at the wides of the week's range at 100%, between 157.38 to 147.54bps, and is trending wider. Main LoVOL (trend wider) is currently trading at the wides of the week's range at 100.06%, between 112.89 to 104.66bps. ExHVOL outperformed LoVOL as the differential compressed to -0.01bps from 1.03bps, but remains above the short-term average of -3.31bps. The Main exFINLS to IG ExHVOL differential decompressed to 44.5bps from 41.93bps, but remains below the short-term average of 48.61bps.

commentary compliments of www.creditresearch.com

Index/Intrinsics Changes

CDR LQD 50 NAIG091 +5.07bps to 249.45 (33 wider - 7 tighter <> 35 steeper - 15 flatter).

CDX12 IG +2.12bps to 189 ($-0.08 to $96.18) (FV +7.66bps to 210.53) (95 wider - 12 tighter <> 76 steeper - 47 flatter) - Trend Wider.

CDX12 HVOL +9bps to 429 (FV +24.93bps to 558.92) (27 wider - 1 tighter <> 14 steeper - 16 flatter) - Trend Wider.

CDX12 ExHVOL -0.05bps to 113.21 (FV +2.94bps to 116.72) (68 wider - 27 tighter <> 31 steeper - 64 flatter).

CDX11 XO +12.6bps to 454.4 (FV +13.16bps to 518.87) (26 wider - 3 tighter <> 15 steeper - 19 flatter) - Trend Wider.

CDX12 HY (30% recovery) Px $-0.63 to $74 / +27.5bps to 1356.3 (FV +59.25bps to 1215.63) (84 wider - 5 tighter <> 21 steeper - 73 flatter) - Trend Wider.

LCDX10 (55% recovery) Px $-1.18 to $74.15 / +91.08bps to 1519.06 - Trend Wider.

MCDX12 +10bps to 205bps. - No Trend.

CDR Counterparty Risk Index rose 6.13bps (2.68%) to 235.07bps (14 wider - 1 tighter).

CDR Government Risk Index rose 2.8bps (4.03%) to 72.36bps.

DXY weakened 0.07% to 86.58.

Oil rose $0.63 to $46.51.

Gold fell $1.04 to $883.46.

VIX fell 2.04pts to 37.14%.

10Y US Treasury yields rose 6.4bps to 2.9%.

S&P500 Futures gained 1.78% to 847.7. Sphere: Related Content
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