Friday, May 15, 2009

Weekly Credit Market Summary: May 15: The Week In Credit

Spreads were broadly wider in the US as all the indices deteriorated this week. Indices generally outperformed intrinsics (single-name shorts versus index long hedges) 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's skew widened as it underperformed.

The names having the largest impact on IG are Hartford Financial Services Group (-67.05bps) pushing IG 0.52bps tighter, and CIT Group Inc (+357.44bps) adding 1.89bps to IG. HVOL is more sensitive with Hartford Financial Services Group pushing it 2.33bps tighter, and CIT Group Inc contributing 8.55bps to HVOL's change this week. The less volatile ExHVOL's move this week is driven by both Allstate Corp (-30bps) pushing the index 0.31bps tighter, and FirstEnergy Corp (+65bps) adding 0.67bps to ExHVOL.

The price of investment grade credit fell 0.54% to around 97.58% of par, while the price of high yield credits fell 3.87% to around 78.38% of par. ABX market prices are lower by 0.87% of par or in absolute terms, 4.9%. Volatility (VIX) is up 1.07pts to 32.59%, with 10Y TSY rallying (yield falling) 15.1bps to 3.14% and the 2s10s curve flattened by 2.3bps, as the cost of protection on US Treasuries rose 6.5bps to 33.5bps. 2Y swap spreads tightened 4.8bps to 41.5bps, as the TED Spread tightened by 9.7bps to 0.67% and Libor-OIS improved 11.3bps to 62.8bps.

The Dollar strengthened with DXY rising 0.55% to 82.98, Oil falling $2.03 to $56.6 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 4.74% today (a 2.91% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $12.3 to $928.95 as the S&P is down (881.7 -4.65%) underperforming IG credits (156.25bps -0.55%) while IG, which opened the week tighter at 145.75bps, outperforms HY credits. IG11 and XOver11 (closed just below 800bps) are +15bps and +56.75bps respectively while ITRX11 is +10.5bps to 134.5bps.

The majority of credit curves flattened 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). [NOTE that single-name curves flattened as steepeners covered while index curves steepened].

Dispersion rose +25bps 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. 90% of IG credits are shifting by more than 3bps and 49% of the CDX universe are also shifting significantly (less than the 5 day average of 63%).

The number of names wider than the index increased by 4 to 44 as the week's range fell to 16bps (one-month average ~25bps), between low bid at 144 and high offer at 160 and higher beta credits (13.99%) outperformed lower beta credits (15.65%). In IG, wideners outpaced tighteners by around 13-to-1, with 114 credits wider. By sector, CONS saw 92% names wider, ENRGs 94% names wider, FINLs 76% names wider, INDUs 96% names wider, and TMTs 96% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 136.38bps and the latter at 133.05bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 376.46bps from 288.83bps, and remains above the short-term average of 318.92bps, with the HY/XOver ratio rising to 1.47x, above its 5-day mean of 1.41x. The IG-Main spread decompressed to 21.75bps from 19bps, and remains above the short-term average of 20.13bps, with the IG/Main ratio rising to 1.16x, above its 5-day mean of 1.15x.

In the US, non-financials underperformed financials as IG ExFINLs are wider by 18.7bps to 133.1bps, with 5 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 14.63bps to 174.27bps, with Banks (worst) wider by 16.21bps to 215.04bps, Finance names (best) wider by 48.28bps to 820.86bps, and Brokers wider by 15bps to 222.08bps. Monolines are trading wider on average by 362.38bps (13.76%) to 2646.7bps. In IG, FINLs outperformed non-FINLs (8.87% wider to 16.31% wider respectively), with the former (IG FINLs) wider by 31.7bps to 389.1bps, with 4 of the 21 names tighter. The IG CDS market (as per CDX) is 3.8bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (152.5bps), with the bond ETFs outperforming the IG CDS market by around 3.05bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 11.44bps to 136.38bps (with ITRX FINLs -trending wider- weaker by 6.75 to 127bps) and is currently trading at the wides of the week's range at 100%, between 136.38 to 124.94bps, and is trending wider. Main LoVOL (sideways trading) is currently trading in the middle of the week's range at 55.15%, between 93.78 to 91.63bps. ExHVOL underperformed LoVOL as the differential decompressed to 0.67bps from -2.55bps, and remains above the short-term average of -0.94bps. The Main exFINLS to IG ExHVOL differential decompressed to 42.89bps from 35.86bps, and remains above the short-term average of 40.04bps.

The Emerging Market index is 6.4% riskier (24.3bps wider) to 405.5bps (although it outperformed intrinsics as sovereign risk rose considerably). EM11 (Trend Wider) is currently trading at the wides of the week's range at 83.41%, between 410.3 to 381.1bps. The HY-EM spread decompressed to 768.76bps from 648.69bps, and remains above the short-term average of 706.13bps, with the HY/EM ratio rising to 2.9x, above its 5-day mean of 2.77x.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 +19.19bps to 199.01 (44 wider - 4 tighter <> 10 steeper - 39 flatter).

CDX12 IG +13.8bps to 156.8 ($-0.56 to $97.56) (FV +21.05bps to 173.59) (115 wider - 9 tighter <> 33 steeper - 92 flatter) - Trend Wider.

CDX12 HVOL +42.96bps to 356.71 (FV +51.29bps to 437.08) (26 wider - 4 tighter <> 11 steeper - 19 flatter) - Trend Wider.

CDX12 ExHVOL +4.59bps to 93.67 (FV +12.44bps to 99.92) (89 wider - 6 tighter <> 73 steeper - 22 flatter).

CDX11 XO +3.9bps to 347.8 (FV +51.47bps to 450.23) (32 wider - 2 tighter <> 6 steeper - 28 flatter) - No Trend.

CDX12 HY (30% recovery) Px $-4.1 to $78.15 / +153.4bps to 1183.3 (FV +105.22bps to 1048.77) (89 wider - 9 tighter <> 17 steeper - 81 flatter) - Trend Wider.

LCDX12 (65% recovery) Px $-2.34 to $78.875 / +148.01bps to 1096.11 - Trend Wider.

MCDX12 +17.33bps to 177.33bps. - Trend Wider.

CDR Counterparty Risk Index rose 14.74bps (9.23%) to 174.38bps (13 wider - 2 tighter).

CDR Government Risk Index rose 9.44bps (20.28%) to 55.97bps.

DXY strengthened 0.55% to 82.98.

Oil fell $2.03 to $56.6.

Gold rose $12.3 to $928.95.

VIX increased 1.07pts to 32.59%.

10Y US Treasury yields fell 15.1bps to 3.14%.

S&P500 Futures lost 4.65% to 881.7. Sphere: Related Content
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