Friday, April 24, 2009

Daily Credit Market Summary: April 24 - Squeeze

Spreads were tighter in the US today as all the indices improved (and curves steepened with shorts getting squeezed at the mid to short-end). Indices typically underperformed single-names with skews mostly narrower as IG underperformed but narrowed the skew, HVOL outperformed but widened 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 Macy's, Inc. (-47.5bps) pushing IG 0.36bps tighter, and CIT Group Inc (+127.41bps) adding 0.7bps to IG. HVOL is more sensitive with Macy's, Inc. pushing it 1.66bps tighter, and CIT Group Inc contributing 3.21bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Fortune Brands Inc. (-27.5bps) pushing the index 0.28bps tighter, and United Parcel Service Inc. (+4.5bps) adding 0.05bps to ExHVOL.

The price of investment grade credit rose 0.22% to around 96.78% of par, while the price of high yield credits rose 1.6% to around 76.13% of par. ABX market prices are higher (improving) by 0.02% of par or in absolute terms, 0.07%. Broadly speaking, CMBX market prices are higher (improving) by 0.19% of par or in absolute terms, 0.49%. Volatility (VIX) is down -0.33pts to 37.37%, with 10Y TSY selling off (yield rising) 6.5bps to 2.99% and the 2s10s curve steepened by 4bps, as the cost of protection on US Treasuries rose 0bps to 45bps. 2Y swap spreads tightened 2bps to 60.75bps, as the TED Spread tightened by 1.7bps to 0.98% and Libor-OIS improved 1.8bps to 87.2bps.

The Dollar weakened with DXY falling 0.87% to 84.769, Oil rising $1.72 to $51.34 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 2.47% today (a 2.6% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $8.75 to $913.05 as the S&P rallies (858.2 1.12%) outperforming IG credits (174.75bps 0.23%) while IG, which opened tighter at 180bps, underperforms HY credits. IG11 and XOver11 are -4bps and -21.01bps respectively while ITRX11 is -3.92bps to 150.5bps.

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 rose +5.7bps in IG (as differentiation remains a theme). 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.

61% of IG credits are shifting by more than 3bps and 67% of the CDX universe are also shifting significantly (more than the 5 day average of 67%). The number of names wider than the index decreased by 3 to 44 as the day's range rose to 8.25bps (one-week average 8.68bps), between low bid at 173 and high offer at 181.25 and higher beta credits (-4.03%) outperformed lower beta credits (-2.99%).

In IG, wideners were outpaced by tighteners by around 6-to-1, with only 14 credits wider at 5Y (although curves were steeper). By sector, CONS saw no names wider, ENRGs 25% names wider, FINLs 24% names wider, INDUs 18% names wider, and TMTs no names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 149.63bps and the latter at 143.29bps.

Cross Market, we are seeing the HY-XOver spread compressing to 433.45bps from 480.35bps, and remains below the short-term average of 471.62bps, with the HY/XOver ratio falling to 1.52x, below its 5-day mean of 1.55x. The IG-Main spread compressed to 24.25bps from 25.58bps, but remains below the short-term average of 28.96bps, with the IG/Main ratio falling to 1.16x, below its 5-day mean of 1.19x.

In the US, non-financials outperformed financials as IG ExFINLs are tighter by 6.7bps to 143.3bps, with 84 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 3.06bps to 225.25bps, with Finance names (worst) wider by 1.4bps to 1015.94bps, Banks (best) tighter by 10.36bps to 289.33bps, and Brokers tighter by 1.75bps to 280.83bps. Monolines are trading wider on average by 13.6bps (0.32%) to 2874.54bps.

In IG, FINLs underperformed non-FINLs (0.44% tighter to 4.49% tighter respectively), with the former (IG FINLs) tighter by 2.1bps to 478.7bps, with 15 of the 21 names tighter. The IG CDS market (as per CDX) is 9.5bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (165.3bps), with the bond ETFs outperforming the IG CDS market by around 0.5bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) rallied 5.01bps to 149.63bps (with ITRX FINLs -trading sideways- weaker by 0.46 to 154bps) and is currently trading tight to its week's range at 21.66%, between 157.19 to 147.54bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading in the middle of the week's range at 34.33%, between 112.76 to 104.83bps. ExHVOL underperformed LoVOL as the differential decompressed to -3.93bps from -5.57bps, but remains below the short-term average of -0.25bps. The Main exFINLS to IG ExHVOL differential compressed to 46.01bps from 48.92bps, but remains above the short-term average of 43.72bps.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -9.32bps to 229.99 (2 wider - 43 tighter <> 35 steeper - 14 flatter).

CDX12 IG -5bps to 175 ($0.21 to $96.77) (FV -6.15bps to 194.6) (13 wider - 101 tighter <> 77 steeper - 47 flatter) - Trend Tighter.

CDX12 HVOL -15.23bps to 400 (FV -14.77bps to 521.43) (2 wider - 28 tighter <> 25 steeper - 5 flatter) - Trend Tighter.

CDX12 ExHVOL -1.77bps to 103.95 (FV -3.76bps to 106.71) (11 wider - 84 tighter <> 37 steeper - 58 flatter).

CDX11 XO -12.3bps to 416.4 (FV -20.09bps to 474.73) (2 wider - 29 tighter <> 25 steeper - 9 flatter) - Trend Tighter.

CDX12 HY (30% recovery) Px $+1.47 to $76 / -62.5bps to 1271.4 (FV -15.24bps to 1154.24) (16 wider - 77 tighter <> 74 steeper - 20 flatter) - Trend Tighter.

LCDX12 (65% recovery) Px $+0.75 to $74.9 / +148.11bps to 1259.37 - Trend Wider.

MCDX12 +0.13bps to 200bps. - No Trend.

CDR Counterparty Risk Index fell 3.51bps (-1.54%) to 224.8bps (4 wider - 11 tighter).

CDR Government Risk Index fell 0.18bps (-0.25%) to 73.14bps..

DXY weakened 0.87% to 84.77.

Oil rose $1.72 to $51.34.

Gold rose $8.75 to $913.05.

VIX fell 0.33pts to 37.37%.

10Y US Treasury yields rose 6.7bps to 2.99%.

S&P500 Futures gained 1.12% to 858.2.

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