Friday, May 29, 2009

Weekly Credit Market Summary: May 29 - The Week In Credit

Spreads were tighter in the US this week as all the indices improved. Indices typically underperformed single-names with skews mostly narrower (as curves steepened and high beta outperformed low beta) 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 outperformed but narrowed the skew.

The names having the largest impact on IG are American International Group, Inc. (-272.37bps) pushing IG 1.24bps tighter, and Pfizer Inc. (+3.5bps) adding 0.03bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 5.5bps tighter, and Caterpillar Inc. contributing -0.07bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both National Rural Utilities Cooperative Finance Corporation (-65.63bps) pushing the index 0.66bps tighter, and Pfizer Inc. (+3.5bps) adding 0.04bps to ExHVOL.

The price of investment grade credit rose 0.41% to around 98.39% of par, while the price of high yield credits rose 2.005% to around 81.63% of par. ABX market prices are lower by 0.61% of par or in absolute terms, 1.75%. Broadly speaking, CMBX market prices are lower by 1.72% of par or in absolute terms, 0.54%. Volatility (VIX) is down 3.71pts to 28.92%, with 10Y TSY selling off (yield rising) 1bps to 3.46% and the 2s10s curve flattened by 2.1bps, as the cost of protection on US Treasuries rose 5.49bps to 48bps. 2Y swap spreads widened 0.1bps to 40.75bps, as the TED Spread widened by 4bps to 0.53% and Libor-OIS deteriorated 0.2bps to 45.5bps.

The Dollar weakened with DXY falling 0.88% to 79.257, Oil rising $4.82 to $66.49 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 5.43% today (a 6.94% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $21.7 to $979.05 as the S&P rallies (918.1 3.75%) outperforming IG credits (137.63bps 0.42%) while IG, which opened the week wider at 150bps, underperforms HY credits. IG11 and XOver11 are -9.83bps and -27.66bps respectively while ITRX11 is -3.66bps to 120.5bps.

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 25.7bps 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 decreasing more than expected this week indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads.

73% of IG credits are shifting by more than 3bps and 57% of the CDX universe are also shifting significantly (more than the 5 day average of 47%). The number of names wider than the index stayed at 41 as the week's range fell to 14bps (one-month average 23.5bps), between low bid at 137 and high offer at 151bps and higher beta credits (-8.46%) outperformed lower beta credits (-6.48%).

In IG, wideners were outpaced by tighteners by around 5-to-1, with only 7 credits notably wider. By sector, CONS saw 5% names wider, ENRGs 6% names wider, FINLs 5% names wider, INDUs 0% names wider, and TMTs 13% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 120.88bps and the latter at 111.92bps.

Cross Market, we are seeing the HY-XOver spread compressing to 332.43bps from 379.64bps, and remains below the short-term average of 367.56bps, with the HY/XOver ratio falling to 1.46x, below its 5-day mean of 1.49x. The IG-Main spread compressed to 17.13bps from 22.86bps, and remains below the short-term average of 21.04bps, with the IG/Main ratio falling to 1.14x, below its 5-day mean of 1.17x.

In the US, non-financials outperformed financials as IG ExFINLs are tighter by 9.1bps to 111.9bps, with 91 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 1.64bps to 150.15bps, with Banks (worst) tighter by 4.45bps to 181.65bps, Finance names (best) tighter by 38.23bps to 681.66bps, and Brokers tighter by 7.97bps to 180.83bps. Monolines are trading tighter on average by -40.87bps (1.24%) to 2549.85bps.

In IG, FINLs underperformed non-FINLs (7.83% tighter to 8.53% tighter respectively), with the former (IG FINLs) tighter by 31.6bps to 326.7bps, with 20 of the 21 names tighter. The IG CDS market (as per CDX) is 11.8bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (125.87bps), with the bond ETFs underperforming the IG CDS market by around 1.3bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) rallied 4.76bps to 120.88bps (with ITRX FINLs -trading sideways- weaker by 0.77 to 119bps) and is currently trading tight to its week's range at 0%, between 128.81 to 120.88bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading at the wides of the week's range at 77.22%, between 86.93 to 82.5bps. ExHVOL outperformed LoVOL as the differential compressed to -3.04bps from 2.32bps, and remains below the short-term average of 0.73bps. The Main exFINLS to IG ExHVOL differential compressed to 38bps from 38.95bps, and remains below the short-term average of 38.51bps.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -12.53bps to 165.86 (2 wider - 43 tighter <> 33 steeper - 16 flatter).

CDX12 IG -9.38bps to 137.63 ($0.41 to $98.39) (FV -12.7bps to 146.15) (7 wider - 111 tighter <> 92 steeper - 33 flatter) - Trend Tighter.

CDX12 HVOL -27.03bps to 311 (FV -32.22bps to 365.19) (0 wider - 30 tighter <> 21 steeper - 9 flatter) - Trend Tighter.

CDX12 ExHVOL -3.81bps to 82.88 (FV -7.04bps to 83.66) (7 wider - 88 tighter <> 24 steeper - 71 flatter).

CDX11 XO -8.2bps to 318.2 (FV -12.76bps to 411.73) (7 wider - 27 tighter <> 19 steeper - 15 flatter) - Trend Tighter.

CDX12 HY (30% recovery) Px $+2.01 to $81.63 / -74.9bps to 1056.4 (FV -69.19bps to 978.37) (28 wider - 69 tighter <> 57 steeper - 41 flatter) - Trend Tighter.

LCDX12 (65% recovery) Px $+1.53 to $81.75 / -93.27bps to 939.04 - Trend Tighter.

MCDX12 +2bps to 180bps. - No Trend.

CDR Counterparty Risk Index fell 1.64bps (-1.08%) to 150.15bps (8 wider - 7 tighter).

CDR Government Risk Index rose 4.04bps (6.61%) to 65.19bps..

DXY weakened 0.88% to 79.26.

Oil rose $4.82 to $66.49.

Gold rose $21.7 to $979.05.

VIX fell 3.71pts to 28.92%.

10Y US Treasury yields rose 1bps to 3.46%.

S&P500 Futures gained 3.75% to 918.1.

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