Monday, May 4, 2009

Daily Credit Market Summary: May 4 - Light Flows

Spreads were tighter in the US as all the indices improved amid light volumes. Indices generally outperformed intrinsics with skews mostly narrower as IG's skew decompressed as the index beat intrinsics, HVOL underperformed but narrowed the skew (as it saw some modest index arb among high beta names), 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 American International Group, Inc. (-172.71bps) pushing IG 0.62bps tighter, and RR Donnelley & Sons Company (+15bps) adding 0.11bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 2.83bps tighter, and RR Donnelley & Sons Company contributing 0.49bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Universal Health Services Inc (-15bps) pushing the index 0.16bps tighter, and Dell Inc. (+5bps) adding 0.05bps to ExHVOL.

The price of investment grade credit rose 0.31% to around 97.55% of par, while the price of high yield credits rose 0.85% to around 79.88% of par. ABX market prices are higher (improving) by 0.2% of par or in absolute terms, 0.93%. Broadly speaking, CMBX market prices are lower by 1.22% of par. Volatility (VIX) is down 0.77pts to 34.48%, with 10Y TSY rallying (yield falling) 0.2bps to 3.16% and the 2s10s curve flattened by 3.4bps, as the cost of protection on US Treasuries rose 0bps to 38bps. 2Y swap spreads widened 0.3bps to 59bps, as the TED Spread tightened by 3.3bps to 0.83% and Libor-OIS deteriorated 0.9bps to 80.1bps.

The Dollar weakened with DXY falling 0.68% to 83.97, Oil rising $1.24 to $54.44 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 0.59% today (a 1.65% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $15.3 to $901.85 as the S&P rallies (904 3.18%) outperforming IG credits (157bps 0.32%) while IG, which opened tighter at 163bps, underperforms HY credits. IG11 and XOver11 are -5.25bps and -9.7bps respectively while ITRX11 is -1.9bps to 141.6bps.

The majority of credit curves steepened (and we saw some very short-dated BWICs) 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 fell -16.3bps 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.

63% of IG credits are shifting by more than 3bps and 61% of the CDX universe are also shifting significantly (less than the 5 day average of 63%). The number of names wider than the index stayed at 43 as the day's range fell to 8.5bps (one-week average 9.55bps), between low bid at 156 and high offer at 164.5 and higher beta credits (-4.21%) outperformed lower beta credits (-3.36%).

In IG, wideners were outpaced by tighteners by around 4-to-1, with 18 credits wider. By sector, CONS saw 8% names wider, ENRGs 25% names wider, FINLs 5% names wider, INDUs 7% names wider, and TMTs 35% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 141.3bps and the latter at 127.43bps.

Cross Market, we are seeing the HY-XOver spread compressing to 311.48bps from 334.3bps, but remains below the short-term average of 369.97bps, with the HY/XOver ratio falling to 1.39x, below its 5-day mean of 1.45x. The IG-Main spread compressed to 15.4bps from 20.75bps, but remains below the short-term average of 22.53bps, with the IG/Main ratio falling to 1.11x, below its 5-day mean of 1.16x.

In the US, non-financials outperformed financials as IG ExFINLs are tighter by 4.4bps to 127.4bps, with 83 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 3.71bps to 227.51bps, with Brokers (worst) tighter by 2.19bps to 288.95bps, Finance names (best) tighter by 38.78bps to 909.1bps, and Banks tighter by 5.89bps to 285.44bps. Monolines are trading wider on average by 12.61bps (0.19%) to 2814.36bps.

In IG, FINLs underperformed non-FINLs (4.74% tighter to 3.35% tighter respectively), with the former (IG FINLs) tighter by 21.7bps to 435.2bps, with 19 of the 21 names tighter. The IG CDS market (as per CDX) is 1.5bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (155.51bps), with the bond ETFs underperforming the IG CDS market by around 8.14bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 1.74bps to 141.3bps (with ITRX FINLs -trending tighter- better by 2.53 to 142.8bps) and is currently trading in the middle of the week's range at 32.97%, between 151.06 to 136.5bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading in the middle of the week's range at 43.35%, between 107.43 to 95.95bps. ExHVOL outperformed LoVOL as the differential compressed to -8.03bps from -4.51bps, but remains below the short-term average of -3.61bps. The Main exFINLS to IG ExHVOL differential decompressed to 48.41bps from 45.34bps, but remains above the short-term average of 45.33bps.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -6.02bps to 217.84 (5 wider - 42 tighter <> 31 steeper - 17 flatter).

CDX12 IG -7.25bps to 157 ($0.31 to $97.55) (FV -7.08bps to 174.99) (18 wider - 102 tighter <> 79 steeper - 44 flatter) - Trend Tighter.

CDX12 HVOL -15bps to 360 (FV -20.47bps to 467.38) (4 wider - 26 tighter <> 23 steeper - 7 flatter) - Trend Tighter.

CDX12 ExHVOL -4.8bps to 92.89 (FV -3.31bps to 96.86) (14 wider - 81 tighter <> 39 steeper - 56 flatter).

CDX11 XO -10.6bps to 367.9 (FV -14.27bps to 435.45) (4 wider - 30 tighter <> 24 steeper - 10 flatter) - Trend Tighter.

CDX12 HY (30% recovery) Px $+0.85 to $79.88 / -32.5bps to 1119.3 (FV -23.34bps to 1051.41) (29 wider - 66 tighter <> 63 steeper - 33 flatter) - Trend Tighter.

LCDX12 (65% recovery) Px $+0.61 to $78.1 / -41.29bps to 1052.9 - Trend Tighter.

MCDX12 +2bps to 195bps. - No Trend.

CDR Counterparty Risk Index fell 3.71bps (-1.6%) to 227.51bps (4 wider - 11 tighter).

CDR Government Risk Index fell 0.4bps (-0.59%) to 67.31bps.

DXY weakened 0.68% to 83.97.

Oil rose $1.24 to $54.44.

Gold rose $15.3 to $901.85.

VIX fell 0.77pts to 34.48%.

10Y US Treasury yields fell 0.2bps to 3.16%.

S&P500 Futures gained 3.18% to 904. Sphere: Related Content
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