Wednesday, May 6, 2009

Daily Credit Market Summary: May 6 - Pop!

Spreads were tighter in the US as all the indices improved (as adjusted IG levels moved back to six-month tights). Indices typically underperformed single-names with skews mostly narrower as IG underperformed but narrowed the skew, HVOL underperformed but narrowed the skew (massive skew compression continues here), ExHVOL outperformed pushing the skew wider, XO underperformed but compressed the skew, and HY's skew widened as it underperformed.

The names having the largest impact on IG are American International Group, Inc. (-603.77bps) pushing IG 2.71bps tighter, and Textron Financial Corp (+13.13bps) adding 0.1bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 12.17bps tighter, and Textron Financial Corp contributing 0.44bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Wells Fargo & Company (-43bps) pushing the index 0.44bps tighter, and United Parcel Service Inc. (+4.83bps) adding 0.05bps to ExHVOL.

The price of investment grade credit rose 0.46% to around 98.06% of par, while the price of high yield credits rose 1.56% to around 81.06% of par. ABX market prices are higher (improving) by 0.16% of par or in absolute terms, 0.91%. Broadly speaking, CMBX market prices are higher (improving) by 2.33% of par. Volatility (VIX) is down 0.91pts to 32.45%, with 10Y TSY selling off (yield rising) 0.2bps to 3.16% and the 2s10s curve steepened by 0.2bps, as the cost of protection on US Treasuries fell 4.41bps to 32.5bps. 2Y swap spreads tightened 5.5bps to 46.5bps, as the TED Spread tightened by 1.1bps to 0.79% and Libor-OIS improved 1.6bps to 76.7bps.

The Dollar weakened with DXY falling 0.42% to 83.803, Oil rising $2.36 to $56.2 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 2.76% today (a 3.96% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $14.2 to $911.35 as the S&P rallies (915.3 1.32%) outperforming IG credits (144.88bps 0.47%) while IG, which opened wider at 157bps, underperforms HY credits. IG11 and XOver11 are -11.25bps and -23.25bps respectively while ITRX11 is -6bps to 130.5bps.

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 fell -44.7bps 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.

65% of IG credits are shifting by more than 3bps and 63% of the CDX universe are also shifting significantly (more than the 5 day average of 62%). The number of names wider than the index stayed at 42 as the day's range rose to 15.75bps (one-week average 10.15bps), between low bid at 142.75 and high offer at 158.5 and higher beta credits (-8.72%) outperformed lower beta credits (-4.37%).

In IG, wideners were outpaced by tighteners by around 10-to-1, with 8 credits wider. By sector, CONS saw 5% names wider, ENRGs 13% names wider, FINLs 5% names wider, INDUs 11% names wider, and TMTs 0% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 129.06bps and the latter at 115.78bps.

Cross Market, we are seeing the HY-XOver spread compressing to 302.92bps from 338.04bps, and remains below the short-term average of 332.76bps, with the HY/XOver ratio falling to 1.39x, below its 5-day mean of 1.41x. The IG-Main spread compressed to 14.38bps from 19.25bps, but remains below the short-term average of 19.78bps, with the IG/Main ratio falling to 1.11x, below its 5-day mean of 1.14x.

In the US, non-financials underperformed financials as IG ExFINLs are tighter by 8.6bps to 115.8bps, with 87 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 25.76bps to 194.73bps, with Finance names (worst) tighter by 40.04bps to 840.9bps, Brokers (best) tighter by 43.69bps to 238.95bps, and Banks tighter by 27.39bps to 244.72bps. Monolines are trading tighter on average by 405.96bps (13.94%) to 2418.79bps.

In IG, FINLs outperformed non-FINLs (9.4% tighter to 6.9% tighter respectively), with the former (IG FINLs) tighter by 40.6bps to 391.3bps, with 17 of the 21 names tighter. The IG CDS market (as per CDX) is -1.9bps rich (we'd expect LQD to outperform TLH) to the LQD-TLH-implied valuation of investment grade credit (146.82bps), with the bond ETFs underperforming the IG CDS market by around 6.9bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) rallied 6.06bps to 129.06bps (with ITRX FINLs -trending tighter- better by 5.78 to 136.25bps) and is currently trading tight to its week's range at 0%, between 143.04 to 129.06bps, and is trending tighter. Main LoVOL (sideways trading) is currently trading tight to its week's range at 0.03%, between 102.21 to 94.34bps. ExHVOL outperformed LoVOL as the differential compressed to -16.45bps from -8.17bps, but remains below the short-term average of -7.1bps. The Main exFINLS to IG ExHVOL differential decompressed to 51.17bps from 47.03bps, but remains above the short-term average of 46.58bps.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -18.68bps to 194.21 (3 wider - 44 tighter <> 42 steeper - 7 flatter).

CDX12 IG -10.87bps to 144.88 ($0.46 to $98.06) (FV -13.59bps to 158.85) (8 wider - 104 tighter <> 93 steeper - 32 flatter) - Trend Tighter.

CDX12 HVOL -13bps to 357 (FV -43.26bps to 403.47) (1 wider - 29 tighter <> 22 steeper - 8 flatter) - Trend Tighter.

CDX12 ExHVOL -10.2bps to 77.89 (FV -5.07bps to 89.92) (7 wider - 88 tighter <> 24 steeper - 71 flatter).

CDX11 XO -9.9bps to 343.9 (FV -15.21bps to 406.36) (2 wider - 30 tighter <> 24 steeper - 10 flatter) - Trend Tighter.

CDX12 HY (30% recovery) Px $+1.56 to $81.06 / -58.4bps to 1074.2 (FV -60.41bps to 980.5) (13 wider - 82 tighter <> 72 steeper - 22 flatter) - Trend Tighter.

LCDX12 (65% recovery) Px $+0.76 to $79.15 / -49.4bps to 1016.47 - Trend Tighter.

MCDX12 -24.5bps to 165bps. - Trend Tighter.

CDR Counterparty Risk Index fell 25.76bps (-11.68%) to 194.73bps (0 wider - 15 tighter).

CDR Government Risk Index fell 6.04bps (-9.31%) to 58.83bps.

DXY weakened 0.42% to 83.8.

Oil rose $2.36 to $56.2.

Gold rose $14.2 to $911.35.

VIX fell 0.91pts to 32.45%.

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

S&P500 Futures gained 1.32% to 915.3. Sphere: Related Content
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