Thursday, May 7, 2009

Daily Credit Market Summary: May 7 - Swing Day

Spreads were mixed in the US with IG wider (after a 10bps gap tighter opening), HVOL improving, ExHVOL weaker, XO wider, and HY rallying (HY-IG decompression came on later in the day). Indices typically underperformed single-names (as talk of major prop desk short-covering were rife) with skews widening in general as IG underperformed but narrowed the skew, HVOL outperformed but widened the skew, ExHVOL's skew widened as it underperformed, 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. (-255.68bps) pushing IG 1.23bps tighter, and Metlife, Inc. (+80.55bps) adding 0.61bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 5.49bps tighter, and Metlife, Inc. contributing 2.74bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both National Rural Utilities Cooperative Finance Corporation (-40bps) pushing the index 0.39bps tighter, and Staples Inc. (+10bps) adding 0.1bps to ExHVOL.

The price of investment grade credit fell 0.12% to around 97.97% of par, while the price of high yield credits rose 0.37% to around 81.5% of par. ABX market prices are higher (improving) by 0.21% of par or in absolute terms, 0%. Broadly speaking, CMBX market prices are higher (improving) by 1.32% of par. Volatility (VIX) is up 0.99pts to 33.45%, with 10Y TSY selling off (yield rising) 17.1bps to 3.34% and the 2s10s curve steepened by 13.9bps, as the cost of protection on US Treasuries fell 3.5bps to 29bps. 2Y swap spreads tightened 1.8bps to 44.75bps, as the TED Spread tightened by 1.6bps to 0.78% and Libor-OIS improved 1.8bps to 75bps.

The Dollar strengthened with DXY rising 0.16% to 83.941, Oil falling $0 to $56.34 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 0.07% today (a 0.16% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $0.67 to $910.55 as the S&P is down (906.7 -1.14%) underperforming IG credits (147bps -0.13%) while IG, which opened tighter at 140bps, underperforms HY credits. IG11 and XOver11 are +0.25bps and -35.75bps respectively while ITRX11 is -6bps to 124.5bps.

The majority of credit curves steepened 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 -20.5bps 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.

60% of IG credits are shifting by more than 3bps and 46% of the CDX universe are also shifting significantly (less than the 5 day average of 58%). The number of names wider than the index decreased by 3 to 39 as the day's range fell to 15.5bps (one-week average 11.4bps), between low bid at 132.5 and high offer at 148 and higher beta credits (-2.56%) underperformed lower beta credits (-2.99%).

In IG, wideners were outpaced by tighteners by around 3-to-1, with 29 credits wider. By sector, CONS saw 46% names wider, ENRGs 0% names wider, FINLs 10% names wider, INDUs 21% names wider, and TMTs 17% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 124.97bps and the latter at 111.84bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 324.08bps from 301.87bps, but remains below the short-term average of 324.91bps, with the HY/XOver ratio rising to 1.44x, above its 5-day mean of 1.41x. The IG-Main spread decompressed to 22.5bps from 13.5bps, and remains above the short-term average of 19.39bps, with the IG/Main ratio rising to 1.18x, above its 5-day mean of 1.14x.

In the US, non-financials underperformed financials as IG ExFINLs are tighter by 4bps to 111.8bps, with 65 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 11.43bps to 178.39bps, with Brokers (worst) tighter by 4.31bps to 234.01bps, Finance names (best) tighter by 42.81bps to 799.57bps, and Banks tighter by 12.11bps to 217.44bps. Monolines are trading tighter on average by -34.77bps (2.27%) to 2391.31bps.

In IG, FINLs outperformed non-FINLs (4.32% tighter to 3.49% tighter respectively), with the former (IG FINLs) tighter by 16.8bps to 370.9bps, with 16 of the 21 names tighter. The IG CDS market (as per CDX) is 1.9bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (145.1bps), with the bond ETFs outperforming the IG CDS market by around 4.71bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 4.09bps to 124.97bps (with ITRX FINLs -trending tighter- better by 13.62 to 122.63bps) and is currently trading tight to its week's range at 0%, between 143.04 to 124.97bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at 0.04%, between 102.21 to 91.97bps. ExHVOL underperformed LoVOL as the differential decompressed to -4.66bps from -17.61bps, and remains above the short-term average of -7.2bps. The Main exFINLS to IG ExHVOL differential compressed to 37.65bps from 52.32bps, and remains below the short-term average of 45.25bps.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -7.22bps to 185.27 (15 wider - 31 tighter <> 22 steeper - 25 flatter).

CDX12 IG +3bps to 147 ($-0.12 to $97.97) (FV -6bps to 152.61) (29 wider - 81 tighter <> 61 steeper - 53 flatter) - Trend Tighter.

CDX12 HVOL -21bps to 336 (FV -13.57bps to 386.17) (9 wider - 17 tighter <> 11 steeper - 16 flatter) - Trend Tighter.

CDX12 ExHVOL +10.58bps to 87.32 (FV -3.82bps to 86.11) (20 wider - 75 tighter <> 45 steeper - 50 flatter).

CDX11 XO 0bps to 343.9 (FV -13.41bps to 392.48) (11 wider - 18 tighter <> 17 steeper - 15 flatter) - Trend Tighter.

CDX12 HY (30% recovery) Px $+0.43 to $81.56 / -15.7bps to 1057.4 (FV -65.55bps to 938.74) (20 wider - 65 tighter <> 66 steeper - 21 flatter) - Trend Tighter.

LCDX12 (65% recovery) Px $+0.25 to $80.65 / -15.35bps to 981.38 - Trend Tighter.

MCDX12 -1bps to 164bps. - Trend Tighter.

CDR Counterparty Risk Index fell 11.43bps (-6.02%) to 178.39bps (2 wider - 13 tighter).

CDR Government Risk Index fell 7.22bps (-12.28%) to 51.61bps.

DXY strengthened 0.16% to 83.94.

Oil is unchanged at $56.34.

Gold fell $0.67 to $910.55.

VIX increased 0.99pts to 33.45% (Risk moving from Sovereigns back to Corporates).

10Y US Treasury yields rose 17.7bps to 3.34%.
S&P500 Futures lost 1.14% to 906.7. Sphere: Related Content
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