Wednesday, April 22, 2009

Daily Credit Market Summary: April 22 - Differentiation^2

Spreads were mixed in the US today with IG tighter, HVOL improving, ExHVOL better, XO stronger, and HY selling off. Indices generally outperformed intrinsics 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 underperformed but compressed the skew, and HY's skew widened as it underperformed.

The names having the largest impact on IG are Macy's, Inc. (-55bps) pushing IG 0.41bps tighter, and American International Group, Inc. (+231.84bps) adding 0.96bps to IG. HVOL is more sensitive with Macy's, Inc. pushing it 1.89bps tighter, and American International Group, Inc. contributing 4.48bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Southwest Airlines Co. (-16.67bps) pushing the index 0.17bps tighter, and Wells Fargo & Company (+12.5bps) adding 0.12bps to ExHVOL.

The price of investment grade credit rose 0.13% to around 96.33% of par, while the price of high yield credits fell 0.25% to around 73.88% of par. ABX market prices are higher (improving) by 0.31% of par or in absolute terms, 0.83%. Broadly speaking, CMBX market prices are higher (improving) by 0.1% of par or in absolute terms, 0.27%. Volatility (VIX) is up 0.96pts to 37.11%, with 10Y TSY selling off (yield rising) 4.2bps to 2.94% and the 2s10s curve steepened by 1.7bps, as the cost of protection on US Treasuries rose 0.5bps to 46.5bps. 2Y swap spreads tightened 1.6bps to 64.75bps, as the TED Spread widened by 0.4bps to 0.96% and Libor-OIS improved 0.7bps to 89.7bps.

The Dollar weakened with DXY falling 0.35% to 86.274, Oil rising $1.53 to $48.04 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 2.21% today (a 2.94% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $9.36 to $893.16 as the S&P rallies (848.9 0.14%) outperforming IG credits (185.5bps 0.13%) while IG, which opened wider at 189bps, outperforms HY credits. IG11 and XOver11 are -5.25bps and +6.17bps respectively while ITRX11 is -2.92bps to 154.5bps.

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 +17.7bps in IG (again seeming to signal more differentiation). 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.

42% of IG credits are shifting by more than 3bps (this is low!) and 53% of the CDX universe are also shifting significantly (less than the 5 day average of 66%). The number of names wider than the index stayed at 48 as the day's range rose to 9.5bps (one-week average 8.75bps), between low bid at 182 and high offer at 191.5 and higher beta credits (-2.01%) outperformed lower beta credits (-1.21%).

In IG, wideners were outpaced by tighteners by around 3-to-1, with 26 credits wider. By sector, CONS saw 3% names wider, ENRGs 25% names wider, FINLs 52% names wider, INDUs 25% names wider, and TMTs 13% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 154.38bps and the latter at 157.25bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 486.59bps from 481.79bps, but remains above the short-term average of 467.44bps, with the HY/XOver ratio rising to 1.56x, above its 5-day mean of 1.55x. The IG-Main spread compressed to 31bps from 31.08bps, but remains above the short-term average of 28.77bps, with the IG/Main ratio rising to 1.2x, above its 5-day mean of 1.19x.

In the US, non-financials outperformed financials as IG ExFINLs are tighter by 3.7bps to 157.2bps, with 72 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 0.38bps to 235.07bps, with Finance names (worst) wider by 18.74bps to 1025.94bps, Banks (best) wider by 5.37bps to 314.6bps, and Brokers wider by 6.88bps to 284.26bps. Monolines are trading wider on average by 31.76bps (1.3%) to 2841.46bps.

In IG, FINLs underperformed non-FINLs (2.39% wider to 2.3% tighter respectively), with the former (IG FINLs) wider by 11.4bps to 490.3bps, with 8 of the 21 names tighter. The IG CDS market (as per CDX) is 16.4bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (169.06bps), with the bond ETFs outperforming the IG CDS market by around 1.72bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 2.81bps to 154.38bps (with ITRX FINLs -trending wider- better by 3.34 to 155bps) and is currently trading in the middle of the week's range at 70.88%, between 157.19 to 147.54bps, and is trending wider. Main LoVOL (trend wider) is currently trading in the middle of the week's range at 67.55%, between 112.76 to 104.66bps. ExHVOL underperformed LoVOL as the differential decompressed to 2.89bps from 2.63bps, but remains above the short-term average of -0.79bps. The Main exFINLS to IG ExHVOL differential compressed to 41.35bps from 41.8bps, but remains below the short-term average of 45.24bps.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -2.16bps to 248.31 (12 wider - 32 tighter <> 29 steeper - 21 flatter).

CDX12 IG -2.75bps to 185.75 ($0.12 to $96.32) (FV -1.49bps to 208.26) (26 wider - 83 tighter <> 68 steeper - 55 flatter) - Trend Wider.

CDX12 HVOL -5bps to 415 (FV -0.66bps to 555.54) (10 wider - 19 tighter <> 19 steeper - 11 flatter) - No Trend.

CDX12 ExHVOL -2.04bps to 113.36 (FV -1.73bps to 115.12) (16 wider - 79 tighter <> 43 steeper - 52 flatter).

CDX11 XO -8.7bps to 443.7 (FV -25.93bps to 508.43) (5 wider - 28 tighter <> 27 steeper - 7 flatter) - Trend Wider.

CDX12 HY (30% recovery) Px $-0.25 to $73.875 / +11.2bps to 1362.3 (FV -25.82bps to 1198.1) (26 wider - 67 tighter <> 71 steeper - 23 flatter) - Trend Wider.

LCDX12 (65% recovery) Px $-0.41 to $73.8 / +250.05bps to 1358.27 - Trend Wider.
MCDX12 -5.25bps to 199.75bps. - Trend Wider.

CDR Counterparty Risk Index fell 0.55bps (-0.23%) to 234.9bps (6 wider - 9 tighter).

CDR Government Risk Index rose 1.41bps (1.95%) to 73.58bps.

DXY weakened 0.35% to 86.27.

Oil rose $1.53 to $48.04.

Gold rose $9.36 to $893.16.

VIX increased 0.96pts to 37.11%.

10Y US Treasury yields rose 4.1bps to 2.94%.

S&P500 Futures gained 0.14% to 848.9. Sphere: Related Content
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