Thursday, May 28, 2009

Daily Credit Market Summary: May 28 - IG Overdone To Charbroiled

Spreads were tighter in the US as all the indices improved (as IG saw its tightest close in Series 12). Indices generally outperformed intrinsics (as it seemed index flows were getting ahead of themselves into the close) 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's skew increased as the index outperformed, and HY outperformed but narrowed the skew.

The names having the largest impact on IG are American International Group, Inc. (-47.87bps) pushing IG 0.21bps tighter, and Textron Financial Corp (+10.1bps) adding 0.08bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 0.95bps tighter, and Textron Financial Corp contributing 0.34bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both National Rural Utilities Cooperative Finance Corporation (-20bps) pushing the index 0.2bps tighter, and AT&T Inc. (+3bps) adding 0.03bps to ExHVOL.

The price of investment grade credit rose 0.24% to around 98.23% of par, while the price of high yield credits rose 0.745% to around 80.38% of par. ABX market prices are lower by 0.71% of par or in absolute terms, 1.81%. Broadly speaking, CMBX market prices are lower (deteriorating) by 0.06% of par or in absolute terms, 0.02%. Volatility (VIX) is down -0.69pts to 31.67%, with 10Y TSY rallying (yield falling) 12.8bps to 3.61% and the 2s10s curve flattened by 11.2bps, as the cost of protection on US Treasuries rose 2.75bps to 47bps. 2Y swap spreads tightened 2.3bps to 41bps, as the TED Spread widened by 1.3bps to 0.53% and Libor-OIS improved 0bps to 46.2bps.

The Dollar weakened with DXY falling 0.39% to 80.455, Oil rising $1.25 to $64.7 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 0.85% today (a 1.58% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $10.55 to $960.45 as the S&P rallies (905.1 1.41%) outperforming IG credits (141.5bps 0.24%) while IG, which opened tighter at 147bps, underperforms HY credits. IG11 and XOver11 are -1.38bps and +6bps respectively while ITRX11 is +2.75bps to 124.25bps.

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 fell -3.3bps 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.

Only 27% of IG credits are shifting by more than 3bps (which is around half typical) and 39% of the CDX universe are also shifting significantly (less than the 5 day average of 47%). The number of names wider than the index increased by 1 to 40 as the day's range fell to 8bps (one-week average 8.85bps), between low bid at 140.5 and high offer at 148.5 and higher beta credits (-0.99%) underperformed lower beta credits (-1.34%).

In IG, wideners were outpaced by tighteners by around 5-to-4, with only 21 credits notably wider. By sector, CONS saw 11% names wider, ENRGs 19% names wider, FINLs 24% names wider, INDUs 18% names wider, and TMTs 17% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 124.81bps and the latter at 116.18bps.

Cross Market, we are seeing the HY-XOver spread compressing to 360.57bps from 394.99bps, and remains below the short-term average of 377.18bps, with the HY/XOver ratio falling to 1.48x, below its 5-day mean of 1.5x. The IG-Main spread compressed to 17.25bps from 25.63bps, and remains below the short-term average of 21.95bps, with the IG/Main ratio falling to 1.14x, below its 5-day mean of 1.18x.

In the US, non-financials outperformed financials as IG ExFINLs are tighter by 1.4bps to 116.2bps, with 54 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 2.75bps to 152.66bps, with Banks (worst) wider by 2.39bps to 183.54bps, Finance names (best) tighter by 0.49bps to 694.04bps, and Brokers wider by 2.19bps to 184.58bps. Monolines are trading wider on average by 12.44bps (0.52%) to 2509.45bps.

In IG, FINLs underperformed non-FINLs (0.76% tighter to 1.2% tighter respectively), with the former (IG FINLs) tighter by 2.6bps to 333.6bps, with 10 of the 21 names tighter. The IG CDS market (as per CDX) is 16.9bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (124.57bps), with the bond ETFs underperforming the IG CDS market by around 10.12bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 3.06bps to 124.81bps (with ITRX FINLs -trading sideways- weaker by 1.5 to 122bps) and is currently trading in the middle of the week's range at 43.34%, between 128.81 to 121.75bps, and is trending tighter. Main LoVOL (sideways trading) is currently trading at the wides of the week's range at 97.82%, between 86.93 to 82.29bps. ExHVOL outperformed LoVOL as the differential compressed to -3.28bps from 6.25bps, and remains below the short-term average of 1.4bps. The Main exFINLS to IG ExHVOL differential decompressed to 41.26bps from 33bps, and remains above the short-term average of 38.76bps.

Commentary provided by

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -1.15bps to 170.95 (12 wider - 30 tighter <> 30 steeper - 18 flatter).

CDX12 IG -5.63bps to 141.5 ($0.24 to $98.23) (FV -1.59bps to 150.81) (22 wider - 65 tighter <> 78 steeper - 46 flatter) - Trend Tighter.

CDX12 HVOL -7bps to 325 (FV -2.4bps to 376.24) (8 wider - 12 tighter <> 15 steeper - 15 flatter) - Trend Tighter.

CDX12 ExHVOL -5.2bps to 83.55 (FV -1.35bps to 86.72) (14 wider - 81 tighter <> 32 steeper - 63 flatter).

CDX11 XO -1.1bps to 322 (FV +1.69bps to 417.86) (19 wider - 10 tighter <> 14 steeper - 20 flatter) - Trend Tighter.

CDX12 HY (30% recovery) Px $+0.75 to $80.375 / -28.4bps to 1105.1 (FV +14.58bps to 993.47) (50 wider - 36 tighter <> 44 steeper - 45 flatter) - Trend Tighter.

LCDX12 (65% recovery) Px $+0.33 to $80.9 / -19.93bps to 968.12 - Trend Tighter.

MCDX12 +1bps to 181bps. - Trend Wider.

CDR Counterparty Risk Index rose 2.89bps (1.93%) to 152.8bps (14 wider - 1 tighter).

CDR Government Risk Index rose 3.43bps (5.43%) to 66.57bps.

DXY weakened 0.39% to 80.46.

Oil rose $1.25 to $64.7.

Gold rose $10.55 to $960.45.

VIX fell 0.69pts to 31.67%.

10Y US Treasury yields fell 12.4bps to 3.62%.

S&P500 Futures gained 1.41% to 905.1. Sphere: Related Content
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