Thursday, April 23, 2009

Daily Credit Market Summary: April 23 - Arbitrage?

Spreads were tighter in the US today as all the indices improved. Indices typically underperformed single-names with skews mostly narrower as IG underperformed but narrowed the skew, HVOL underperformed but narrowed the skew, ExHVOL intrinsics beat and narrowed the skew, XO underperformed but compressed the skew, and HY outperformed but narrowed the skew.

The names having the largest impact on IG are International Paper Co. (-50bps) pushing IG 0.37bps tighter, and CIT Group Inc (+115.49bps) adding 0.66bps to IG. HVOL is more sensitive with International Paper Co. pushing it 1.71bps tighter, and CIT Group Inc contributing 3.04bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Black & Decker Corporation (-32.75bps) pushing the index 0.34bps tighter, and Allstate Corp (+1.25bps) adding 0.01bps to ExHVOL.

The price of investment grade credit rose 0.21% to around 96.53% of par, while the price of high yield credits rose 0.63% to around 74.63% of par. ABX market prices are higher (improving) by 0.07% of par or in absolute terms, 0.15%. Broadly speaking, CMBX market prices are higher (improving) by 0.15% of par or in absolute terms, 0.39%. Volatility (VIX) is down -0.95pts to 37.22%, with 10Y TSY rallying (yield falling) 1.6bps to 2.93% and the 2s10s curve steepened by 1.7bps, as the cost of protection on US Treasuries fell 1.76bps to 45bps. 2Y swap spreads tightened 1bps to 62.5bps, as the TED Spread widened by 3.2bps to 1% and Libor-OIS improved 1.3bps to 88.5bps.

The Dollar weakened with DXY falling 0.78% to 85.517, Oil rising $0.55 to $49.4 (outperforming the dollar as the value of Oil (rebased to the value of gold) fell by 0.26% today (a 0.35% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $12.4 to $902.15 as the S&P rallies (848.4 1.37%) outperforming IG credits (180.75bps 0.22%) while IG, which opened tighter at 185.5bps, underperforms HY credits. IG11 and XOver11 are -4.5bps and -9.58bps respectively while ITRX11 is -0.43bps 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 +2.6bps 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.

60% of IG credits are shifting by more than 3bps and 63% of the CDX universe are also shifting significantly (less than the 5 day average of 66%). The number of names wider than the index decreased by 1 to 47 as the day's range fell to 6.88bps (one-week average 8.63bps), between low bid at 179.5 and high offer at 186.375 and higher beta credits (-4.33%) outperformed lower beta credits (-3.42%).

In IG, wideners were outpaced by tighteners by around 6-to-1, with 10 credits wider. By sector, CONS saw 5% names wider, ENRGs 13% names wider, FINLs 24% names wider, INDUs 0% names wider, and TMTs 4% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 154.75bps and the latter at 149.7bps.

Cross Market, we are seeing the HY-XOver spread compressing to 476.02bps from 493.9bps, but remains above the short-term average of 474.3bps, with the HY/XOver ratio falling to 1.56x, below its 5-day mean of 1.56x. The IG-Main spread compressed to 26.25bps from 30.82bps, and remains below the short-term average of 29.3bps, with the IG/Main ratio falling to 1.17x, below its 5-day mean of 1.19x.

In the US, non-financials outperformed financials as IG ExFINLs are tighter by 7.6bps to 149.7bps, with 94 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 8.82bps to 228.31bps, with Brokers (worst) tighter by 6.25bps to 280.83bps, Banks (best) tighter by 15.71bps to 301.65bps, and Finance names tighter by 17.34bps to 1003.71bps. Monolines are trading wider on average by 118.79bps (3.31%) to 2926.7bps.

In IG, FINLs underperformed non-FINLs (0.62% tighter to 4.83% tighter respectively), with the former (IG FINLs) tighter by 3bps to 483.4bps, with 11 of the 21 names tighter. The IG CDS market (as per CDX) is 9.7bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (171.05bps), with the bond ETFs underperforming the IG CDS market by around 6.98bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 0.1bps to 154.75bps (with ITRX FINLs -trading sideways- better by 1.74 to 153.5bps) and is currently trading in the middle of the week's range at 74.72%, between 157.19 to 147.54bps, and is trending wider. Main LoVOL (trend wider) is currently trading at the wides of the week's range at 85.09%, between 112.76 to 104.66bps. ExHVOL outperformed LoVOL as the differential compressed to -3.2bps from 2.18bps, and remains below the short-term average of -0.62bps. The Main exFINLS to IG ExHVOL differential decompressed to 46.39bps from 43.07bps, and remains above the short-term average of 44.37bps.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -11.2bps to 238.54 (4 wider - 46 tighter <> 32 steeper - 18 flatter).
CDX12 IG -5.5bps to 180.25 ($0.23 to $96.55) (FV -7.02bps to 200.77) (10 wider - 105 tighter <> 80 steeper - 45 flatter) - No Trend.
CDX12 HVOL -10bps to 410 (FV -15.57bps to 536.92) (4 wider - 24 tighter <> 17 steeper - 12 flatter) - No Trend.
CDX12 ExHVOL -4.08bps to 107.7 (FV -4.67bps to 110.35) (6 wider - 89 tighter <> 29 steeper - 66 flatter).
CDX11 XO -14.4bps to 429.3 (FV -20.46bps to 485.41) (4 wider - 28 tighter <> 21 steeper - 13 flatter) - Trend Wider.
CDX12 HY (30% recovery) Px $+0.63 to $74.63 / -27.5bps to 1328.5 (FV -26.17bps to 1176.9) (21 wider - 68 tighter <> 62 steeper - 30 flatter) - Trend Wider.
LCDX12 (65% recovery) Px $+0.51 to $74.35 / +181.01bps to 1313.64 - Trend Wider.
MCDX12 0bps to 199.75bps. - Trend Wider.
CDR Counterparty Risk Index fell 8.5bps (-3.59%) to 228.63bps (1 wider - 14 tighter).
CDR Government Risk Index fell 0.18bps (-0.25%) to 73.29bps.
DXY weakened 0.78% to 85.52.
Oil rose $0.55 to $49.4.
Gold rose $12.4 to $902.15.
VIX fell 0.95pts to 37.22%.
10Y US Treasury yields fell 1.6bps to 2.93%.
S&P500 Futures gained 1.37% to 848.4. Sphere: Related Content
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