Monday, May 18, 2009

Daily Credit Market Summary: May 18 - Caught Short

Spreads were tighter in the US as all the indices improved. Indices generally outperformed intrinsics with skews mostly narrower (with the late-day gap tighter in indices not seen in single-names and rumored to be driven by a couple of dealers caught short) as IG's skew decompressed as the index beat intrinsics, HVOL underperformed but narrowed the skew, ExHVOL outperformed pushing the skew wider, XO underperformed but compressed the skew, and HY outperformed but narrowed the skew.

The names having the largest impact on IG are Alcoa Inc. (-39.38bps) pushing IG 0.31bps tighter, and American International Group, Inc. (+71.91bps) adding 0.33bps to IG. HVOL is more sensitive with Alcoa Inc. pushing it 1.39bps tighter, and American International Group, Inc. contributing 1.5bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Allstate Corp (-18.5bps) pushing the index 0.19bps tighter, and FirstEnergy Corp (+6.67bps) adding 0.07bps to ExHVOL.

The price of investment grade credit rose 0.37% to around 97.92% of par, while the price of high yield credits rose 1.12% to around 79.25% of par. ABX market prices are higher (improving) by 0.37% of par or in absolute terms, 1.34%. Broadly speaking, CMBX market prices are higher (improving) by 0.27% of par or in absolute terms, 0.82%. Volatility (VIX) is down -2.88pts to 30.02%, with 10Y TSY selling off (yield rising) 8.5bps to 3.22% and the 2s10s curve steepened by 3.7bps, as the cost of protection on US Treasuries rose 2.43bps to 37.75bps. 2Y swap spreads tightened 4.8bps to 37bps, as the TED Spread tightened by 4.2bps to 0.63% and Libor-OIS improved 5.1bps to 57.7bps.

The Dollar weakened with DXY falling 0.56% to 82.563, Oil rising $2.89 to $59.23 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 6.61% today (a 4.57% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $12.95 to $918.85 as the S&P rallies (907.7 2.8%) outperforming IG credits (148.25bps 0.38%) while IG, which opened tighter at 156.75bps, underperforms HY credits. IG11 and XOver11 are -4.66bps and -7.86bps respectively while ITRX11 is +1bps to 135.5bps.

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 +2.9bps 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.

52% of IG credits are shifting by more than 3bps and 60% of the CDX universe are also shifting significantly (less than the 5 day average of 61%). The number of names wider than the index increased by 1 to 45 as the day's range rose to 11.5bps (one-week average 7.53bps), between low bid at 147.5 and high offer at 159 and higher beta credits (-2.21%) underperformed lower beta credits (-2.4%).

In IG, wideners were outpaced by tighteners by around 5-to-2, with only 21 credits wider. By sector, CONS saw 11% names wider, ENRGs 19% names wider, FINLs 19% names wider, INDUs 29% names wider, and TMTs 9% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 137.38bps and the latter at 129.77bps.

Cross Market, we are seeing the HY-XOver spread compressing to 352bps from 387.63bps, but remains above the short-term average of 331.88bps, with the HY/XOver ratio falling to 1.45x, above its 5-day mean of 1.42x. The IG-Main spread compressed to 12.75bps from 22.3bps, and remains below the short-term average of 19.18bps, with the IG/Main ratio falling to 1.09x, below its 5-day mean of 1.14x.

In the US, non-financials outperformed financials as IG ExFINLs are tighter by 3.3bps to 129.8bps, with 80 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 3.11bps to 170.95bps, with Finance names (worst) tighter by 5.55bps to 813.25bps, Banks (best) tighter by 7.32bps to 207.94bps, and Brokers tighter by 7.5bps to 213.33bps. Monolines are trading wider on average by 14.84bps (0.51%) to 2625.34bps.

In IG, FINLs underperformed non-FINLs (0.68% tighter to 2.44% tighter respectively), with the former (IG FINLs) tighter by 2.7bps to 388.7bps, with 16 of the 21 names tighter. The IG CDS market (as per CDX) is 1.8bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (146.47bps), with the bond ETFs underperforming the IG CDS market by around 2.53bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 1bps to 137.38bps (with ITRX FINLs -trading sideways- weaker by 1 to 128bps) and is currently trading at the wides of the week's range at 100%, between 137.38 to 129.94bps, and is trending wider. Main LoVOL (sideways trading) is currently trading in the middle of the week's range at 44.75%, between 93.78 to 92.13bps. ExHVOL outperformed LoVOL as the differential compressed to -9.91bps from 0.79bps, and remains below the short-term average of -2.14bps. The Main exFINLS to IG ExHVOL differential decompressed to 54.42bps from 42.71bps, and remains above the short-term average of 43.1bps.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -4.82bps to 194.26 (3 wider - 44 tighter <> 40 steeper - 9 flatter).

CDX12 IG -8.55bps to 148.25 ($0.37 to $97.92) (FV -3.16bps to 170.47) (21 wider - 96 tighter <> 97 steeper - 28 flatter) - No Trend.

CDX12 HVOL -1.71bps to 355 (FV -4.99bps to 431.58) (5 wider - 24 tighter <> 20 steeper - 10 flatter) - Trend Wider.

CDX12 ExHVOL -10.71bps to 82.96 (FV -2.63bps to 97.4) (16 wider - 79 tighter <> 18 steeper - 77 flatter).

CDX11 XO -1.7bps to 347.4 (FV -6.59bps to 442.05) (8 wider - 26 tighter <> 24 steeper - 10 flatter) - No Trend.

CDX12 HY (30% recovery) Px $+1.12 to $79.25 / -43.5bps to 1141.5 (FV -29.63bps to 1037.86) (33 wider - 60 tighter <> 70 steeper - 28 flatter) - Trend Wider.

LCDX12 (65% recovery) Px $+0.34 to $79.15 / -22.98bps to 1074.46 - Trend Wider.

MCDX12 +6.67bps to 184bps. - Trend Wider.

CDR Counterparty Risk Index fell 3.11bps (-1.79%) to 170.95bps (5 wider - 10 tighter).

CDR Government Risk Index rose 3.72bps (6.64%) to 59.69bps.

DXY weakened 0.56% to 82.56.

Oil rose $2.89 to $59.23.

Gold fell $12.95 to $918.85.

VIX fell 2.88pts to 30.02%.

10Y US Treasury yields rose 8.5bps to 3.22%.

S&P500 Futures gained 2.8% to 907.7. Sphere: Related Content
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