Tuesday, May 26, 2009

Daily Credit Market Summary: May 26 - Low Vol, Lower Volume

Spreads were tighter in the US today as all the indices improved (but were well off their tights by the close). Indices typically underperformed single-names with skews mostly narrower as IG underperformed but narrowed the skew, HVOL underperformed but narrowed the skew, ExHVOL intrinsics beat and narrowed the skew, XO underperformed but compressed the skew, and HY's skew widened as it underperformed.

The names having the largest impact on IG are XL Capital Limited (-42.88bps) pushing IG 0.34bps tighter, and American International Group, Inc. (+19.07bps) adding 0.08bps to IG. HVOL is more sensitive with XL Capital Limited pushing it 1.52bps tighter, and American International Group, Inc. contributing 0.36bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Constellation Energy Group Inc. (-16.26bps) pushing the index 0.16bps tighter, and Pfizer Inc. (+6.25bps) adding 0.07bps to ExHVOL.

The price of investment grade credit rose 0.13% to around 98.11% of par, while the price of high yield credits rose 0.255% to around 79.88% of par. ABX market prices are higher (improving) by 0.09% of par or in absolute terms, 0.96%. Broadly speaking, CMBX market prices are lower by 2.3% of par (thanks in large part to S&P's CMBS announcement). Volatility (VIX) is down 1.99pts to 30.65% (after opening at 35%), with 10Y TSY selling off (yield rising) 9.8bps to 3.55% and the 2s10s curve steepened by 6.5bps, as the cost of protection on US Treasuries rose 0.49bps to 43bps. 2Y swap spreads widened 4.1bps to 44.69bps, as the TED Spread widened by 0.7bps to 0.49% and Libor-OIS deteriorated 0.1bps to 45.4bps.

The Dollar strengthened with DXY rising 0.22% to 80.134, Oil rising $0.64 to $62.31 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 1.54% today (a 1.26% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $4.7 to $952.65 as the S&P rallies (907.3 2.53%) outperforming IG credits (144.25bps 0.13%) while IG, which opened wider at 150bps, underperforms HY credits. IG11 and XOver11 are -3.58bps and -4.16bps respectively while ITRX11 is -1.41bps to 122.75bps.

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 2.6bps 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.

Only 36% of IG credits are shifting by more than 3bps and 52% of the CDX universe are also shifting significantly (less than the 5 day average of 56%). The number of names wider than the index increased by 1 to 42 as the day's range rose to 10.25bps (one-week average 9.45bps), between low bid at 140.75 and high offer at 151 and higher beta credits (-2.97%) outperformed lower beta credits (-0.99%).

In IG, wideners were outpaced by tighteners by around 5-to-2, with 31 credits wider. By sector, CONS saw 27% names wider, ENRGs 38% names wider, FINLs 19% names wider, INDUs 18% names wider, and TMTs 26% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 123.31bps and the latter at 118.94bps.

Cross Market, we are seeing the HY-XOver spread compressing to 373.97bps from 379.54bps, but remains above the short-term average of 369.24bps, with the HY/XOver ratio falling to 1.5x, above its 5-day mean of 1.49x. The IG-Main spread compressed to 21.5bps from 22.86bps, but remains above the short-term average of 19.63bps, with the IG/Main ratio falling to 1.18x, above its 5-day mean of 1.16x.

In the US, non-financials underperformed financials as IG ExFINLs are tighter by 1.9bps to 118.9bps, with 71 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 0.51bps to 151.27bps, with Brokers (worst) tighter by 2.97bps to 185.83bps, Banks (best) tighter by 5.02bps to 181.08bps, and Finance names tighter by 11.06bps to 708.75bps. Monolines are trading tighter on average by -44.16bps (1.65%) to 2545.92bps.

In IG, FINLs outperformed non-FINLs (3.41% tighter to 1.58% tighter respectively), with the former (IG FINLs) tighter by 12.1bps to 341.7bps, with 17 of the 21 names tighter. The IG CDS market (as per CDX) is 18.6bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (125.67bps), with the bond ETFs outperforming the IG CDS market by around 5.52bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) rallied 2.33bps to 123.31bps (with ITRX FINLs -trending wider- weaker by 2.27 to 120.5bps) and is currently trading tight to its week's range at 3.83%, between 137.38 to 122.75bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading tight to its week's range at 5.59%, between 92.87 to 82.29bps. ExHVOL underperformed LoVOL as the differential decompressed to 2.71bps from 2.32bps, but remains above the short-term average of -1.45bps. The Main exFINLS to IG ExHVOL differential compressed to 37.72bps from 38.95bps, but remains below the short-term average of 43.2bps.

Commentary compliments of www.creditresearch.com

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -3.88bps to 174.51 (9 wider - 39 tighter <> 36 steeper - 13 flatter).

CDX12 IG -2.76bps to 144.25 ($0.13 to $98.11) (FV -3.74bps to 154.15) (30 wider - 89 tighter <> 101 steeper - 24 flatter) - No Trend.

CDX12 HVOL -8.03bps to 330 (FV -12.05bps to 384.66) (2 wider - 28 tighter <> 26 steeper - 4 flatter) - Trend Tighter.

CDX12 ExHVOL -1.1bps to 85.59 (FV -1.34bps to 89.25) (28 wider - 67 tighter <> 20 steeper - 75 flatter).

CDX11 XO -0.4bps to 326 (FV -4.28bps to 419.5) (8 wider - 23 tighter <> 27 steeper - 6 flatter) - Trend Tighter.

CDX12 HY (30% recovery) Px $+0.25 to $79.88 / -9.7bps to 1122.4 (FV -25.78bps to 998.59) (32 wider - 59 tighter <> 59 steeper - 34 flatter) - Trend Wider.

LCDX12 (65% recovery) Px $+0.53 to $80.6 / -33.57bps to 999.88 - Trend Tighter.

MCDX12 +2bps to 180bps. - Trend Wider.

CDR Counterparty Risk Index fell 0.23bps (-0.15%) to 151.55bps (8 wider - 7 tighter).

CDR Government Risk Index rose 1.34bps (2.19%) to 62.48bps.

DXY strengthened 0.24% to 80.15.

Oil rose $0.71 to $62.38.

Gold fell $3.6 to $953.75.

VIX fell 2.02pts to 30.63%.

10Y US Treasury yields rose 9.2bps to 3.54%.

S&P500 Futures gained 2.78% to 909.5. Sphere: Related Content
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