Thursday, April 30, 2009

Daily Credit Market Summary: April 30 - Capitulation

Spreads were tighter in the US today as all the indices improved (although the early capitulation rally gave way to OWICs and derisking as the afternoon wore on). Indices typically underperformed single-names with skews mostly narrower as IG underperformed but narrowed the skew, HVOL underperformed but narrowed the skew (but remains the richest index), ExHVOL outperformed pushing the skew wider (after getting to zero intraday), XO underperformed but compressed the skew, and HY's skew widened as it underperformed.

The names having the largest impact on IG are International Lease Finance Corp. (-107.29bps) pushing IG 0.64bps tighter, and American Express Company (+15bps) adding 0.11bps to IG. HVOL is more sensitive with International Lease Finance Corp. pushing it 2.93bps tighter, and American Express Company contributing 0.5bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Viacom Inc. (-25bps) pushing the index 0.26bps tighter, and Wells Fargo & Company (+7.5bps) adding 0.07bps to ExHVOL.

The price of investment grade credit rose 0.27% to around 97.34% of par, while the price of high yield credits rose 1.37% to around 79.25% of par. ABX market prices are higher (improving) by 0.22% of par or in absolute terms, 0.45%. Broadly speaking, CMBX market prices are higher (improving) by 2.68% of par. Volatility (VIX) is up 0.42pts to 36.34%, with 10Y TSY selling off (yield rising) 0.8bps to 3.12% and the 2s10s curve steepened by 5.5bps, as the cost of protection on US Treasuries fell 3bps to 39bps. 2Y swap spreads widened 1.7bps to 57.2bps, as the TED Spread tightened by 4.5bps to 0.89% and Libor-OIS improved 0.8bps to 82.4bps.

The Dollar strengthened with DXY rising 0.17% to 84.614, Oil rising $0.13 to $51.1 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 1.32% today (a 0.43% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $9.46 to $888.54 as the S&P rallies (870.7 0.18%) outperforming IG credits (161.75bps 0.27%) while IG, which opened tighter at 164.5bps, underperforms HY credits. IG11 and XOver11 are -6.5bps and -3.17bps respectively while ITRX11 is -5.5bps to 138.5bps.

The majority of credit curves flattened (bucking the recent steepening trend) 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 fell 8.1bps 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 decreasing more than expected today indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads.

Only 51% 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 63%). The number of names wider than the index increased by 2 to 43 as the day's range fell to 9.25bps (one-week average 9bps), between low bid at 156.5 and high offer at 165.75 and higher beta credits (-6.1%) outperformed lower beta credits (-1.57%), further evidence of a capitulative short-covering.

In IG, wideners were outpaced by tighteners by around 8-to-1 (but the majority were well off their intraday tights by the close), with 26 credits wider. By sector, CONS saw 24% names wider, ENRGs 19% names wider, FINLs 33% names wider, INDUs 14% names wider, and TMTs 13% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 137.47bps and the latter at 127.27bps.

Cross Market, we are seeing the HY-XOver spread compressing to 326.57bps from 376.9bps, but remains below the short-term average of 412.41bps, with the HY/XOver ratio falling to 1.4x, below its 5-day mean of 1.49x. The IG-Main spread compressed to 23.25bps from 24bps, but remains below the short-term average of 24.5bps, with the IG/Main ratio rising to 1.17x, above its 5-day mean of 1.16x.

In the US, non-financials outperformed financials as IG ExFINLs are tighter by 5.6bps to 127.3bps, with 73 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 2.51bps to 227.17bps, with Brokers (worst) wider by 1.44bps to 284.58bps, Finance names (best) tighter by 47.43bps to 947.86bps, and Banks wider by 0.26bps to 285.97bps. Monolines are trading tighter on average by -44.82bps (1.36%) to 2728.76bps.

In IG, FINLs underperformed non-FINLs (3.79% tighter to 4.24% tighter respectively), with the former (IG FINLs) tighter by 17.9bps to 454.8bps, with 13 of the 21 names tighter. The IG CDS market (as per CDX) is 4.5bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (157.29bps), with the bond ETFs underperforming the IG CDS market by around 5.09bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 5bps to 137.47bps (with ITRX FINLs -trending tighter- better by 7.51 to 142.63bps) and is currently trading tight to its week's range at 0%, between 154.64 to 137.47bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at 0.01%, between 111.28 to 97.13bps. ExHVOL underperformed LoVOL as the differential decompressed to -4.3bps from -5.19bps, but remains below the short-term average of -4.05bps. The Main exFINLS to IG ExHVOL differential compressed to 44.64bps from 46.74bps, and remains below the short-term average of 46.42bps.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -4.68bps to 217.79 (14 wider - 30 tighter <> 14 steeper - 35 flatter).

CDX12 IG -6.25bps to 161.75 ($0.27 to $97.34) (FV -7.52bps to 177.55) (26 wider - 86 tighter <> 43 steeper - 81 flatter) - Trend Tighter.

CDX12 HVOL -16.85bps to 380 (FV -24.43bps to 482.55) (5 wider - 24 tighter <> 11 steeper - 19 flatter) - Trend Tighter.

CDX12 ExHVOL -2.9bps to 92.83 (FV -2.78bps to 97.27) (21 wider - 74 tighter <> 62 steeper - 33 flatter).

CDX11 XO -17.8bps to 369.6 (FV -24.39bps to 434.63) (3 wider - 29 tighter <> 17 steeper - 17 flatter) - Trend Tighter.

CDX12 HY (30% recovery) Px $+1.37 to $79.25 / -53.5bps to 1142.1 (FV -95.3bps to 1053.19) (4 wider - 95 tighter <> 79 steeper - 20 flatter) - Trend Tighter.

LCDX12 (65% recovery) Px $+1 to $77.5 / -72.19bps to 1092.39 - Trend Tighter.

MCDX12 -0.33bps to 195bps. - Trend Tighter.

CDR Counterparty Risk Index fell 2.51bps (-1.09%) to 227.17bps (5 wider - 10 tighter).

CDR Government Risk Index fell 4.42bps (-6.07%) to 68.45bps.

DXY strengthened 0.17% to 84.61.

Oil rose $0.13 to $51.1.

Gold fell $9.46 to $888.54.

VIX increased 0.42pts to 36.34%.

10Y US Treasury yields rose 0.8bps to 3.12%.

S&P500 Futures gained 0.18% to 870.7. Sphere: Related Content
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