Monday, June 1, 2009

Daily Credit Market Summary: June 1 - 2009 Tights

Spreads were tighter in the US as index spreads were tighter across the board as IG12 and HY12 made new contract tights (even as IG11 underperformed). Indices typically underperformed single-names with skews mostly narrower as IG underperformed but narrowed the skew (with IG skew now at its tightest), HVOL underperformed but narrowed the skew, ExHVOL outperformed pushing the skew wider, XO underperformed but compressed the skew, and HY outperformed (breaking below 1000bps) but narrowed the skew.

The names having the largest impact on IG are American International Group, Inc. (-297.26bps) pushing IG 1.48bps tighter, and Du Pont E.I. de Nemours & Co (+6.5bps) adding 0.05bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 6.51bps tighter, and RR Donnelley & Sons Company contributing -0.16bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Time Warner Cable Inc. (-30bps) pushing the index 0.31bps tighter, and Du Pont E.I. de Nemours & Co (+6.5bps) adding 0.07bps to ExHVOL.

The price of investment grade credit rose 0.39% to around 98.82% of par, while the price of high yield credits rose 2.375% to around 84.13% of par. ABX market prices are lower by 0.07% of par or in absolute terms, 0.98%. Broadly speaking, CMBX market prices are higher (improving) by 1.03% of par or in absolute terms, 0.32%. Volatility (VIX) is up 1.13pts to 29.95%, with 10Y TSY selling off (yield rising) 21.9bps to 3.68% and the 2s10s curve steepened by 17.9bps, as the cost of protection on US Treasuries fell 3.15bps to 45.5bps. 2Y swap spreads widened 7bps to 47.75bps, as the TED Spread widened by 3.2bps to 0.56% and Libor-OIS improved 1.4bps to 44.2bps.

The Dollar weakened with DXY falling 0.24% to 79.16, Oil rising $2.17 to $68.48 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 3.79% today (a 3.03% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $4.9 to $974.25 as the S&P rallies (941 2.49%) outperforming IG credits (127.75bps 0.4%) while IG, which opened tighter at 133bps, underperforms HY credits. IG11 and XOver11 are +3.5bps and -37.47bps respectively while ITRX11 is -8.52bps to 112bps.

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 30.1bps in IG. Broad market dispersion is still a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, but dispersion decreasing more than expected today indicating a more systemic and less idiosyncratic spread widening/tightening at the tails.

78% of IG credits are shifting by more than 3bps and 76% of the CDX universe are also shifting significantly (more than the 5 day average of 55%). The number of names wider than the index decreased by 1 to 40 as the day's range rose to 7.75bps (one-week average 8.1bps), between low bid at 126.5 and high offer at 134.25 and higher beta credits (-8.61%) outperformed lower beta credits (-6.34%).

In IG, wideners were outpaced by tighteners by around 20-to-1, with only 3 credits notably wider. By sector, CONS saw 0% names wider, ENRGs 6% names wider, FINLs 0% names wider, INDUs 7% names wider, and TMTs 0% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 112.25bps and the latter at 104.48bps.

Cross Market, we are seeing the HY-XOver spread compressing to 284.67bps from 331.89bps, but remains below the short-term average of 356.94bps, with the HY/XOver ratio falling to 1.41x, below its 5-day mean of 1.49x. The IG-Main spread compressed to 15.75bps from 16.48bps, but remains below the short-term average of 20.19bps, with the IG/Main ratio rising to 1.14x, below its 5-day mean of 1.17x.

In the US, non-financials underperformed financials as IG ExFINLs are tighter by 7.9bps to 104.5bps, with 100 of the 104 names tighter, while among US Financials, the CDR Counterparty Risk Index fell 9.92bps to 139.98bps, with Banks (worst) tighter by 8.64bps to 171.97bps, Brokers (best) tighter by 16.38bps to 165.2bps, and Finance names tighter by 44.84bps to 636.88bps. Monolines are trading tighter on average by -133.55bps (5.23%) to 2417.82bps.

In IG, FINLs outperformed non-FINLs (11.59% tighter to 7.01% tighter respectively), with the former (IG FINLs) tighter by 38.6bps to 294.2bps, with 21 of the 21 names tighter. The IG CDS market (as per CDX) is 16.8bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (110.95bps), with the bond ETFs outperforming the IG CDS market by around 5.67bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) rallied 8.64bps to 112.25bps (with ITRX FINLs -trending tighter- better by 8.06 to 111bps) and is currently trading tight to its week's range at 0%, between 125.64 to 112.25bps, and is trending tighter. Main LoVOL (sideways trading) is currently trading tight to its week's range at 0.01%, between 86.91 to 79.71bps. ExHVOL outperformed LoVOL as the differential compressed to -11.86bps from -5.93bps, but remains below the short-term average of -1.42bps. The Main exFINLS to IG ExHVOL differential decompressed to 44.4bps from 40.87bps, but remains above the short-term average of 39.1bps.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -12.6bps to 153.92 (0 wider - 49 tighter <> 38 steeper - 11 flatter).

CDX12 IG -9.25bps to 127.75 ($0.39 to $98.82) (FV -12.8bps to 134.93) (3 wider - 121 tighter <> 88 steeper - 36 flatter) - Trend Tighter.

CDX12 HVOL 0bps to 317.43 (FV -36.82bps to 330.3) (0 wider - 30 tighter <> 24 steeper - 6 flatter) - Trend Tighter.

CDX12 ExHVOL -12.17bps to 67.85 (FV -5.76bps to 78.16) (3 wider - 92 tighter <> 31 steeper - 64 flatter).

CDX11 XO 0bps to 316.1 (FV -16.95bps to 390.26) (3 wider - 31 tighter <> 25 steeper - 9 flatter) - Trend Tighter.

CDX12 HY (30% recovery) Px $+2.38 to $84.125 / -84.7bps to 971.2 (FV -38.86bps to 945.72) (5 wider - 88 tighter <> 64 steeper - 29 flatter) - Trend Tighter.

LCDX12 (65% recovery) Px $+1.96 to $83.9 / -101.38bps to 797.22 - Trend Tighter.

MCDX12 -5bps to 175bps. - No Trend.

CDR Counterparty Risk Index fell 9.92bps (-6.62%) to 139.98bps (0 wider - 15 tighter).

CDR Government Risk Index fell 2.93bps (-4.47%) to 62.57bps.

DXY weakened 0.24% to 79.16.

Oil rose $2.17 to $68.48.

Gold fell $4.9 to $974.25.

VIX increased 1.12pts to 29.95%.

10Y US Treasury yields rose 22.3bps to 3.69%.

S&P500 Futures gained 2.49% to 941. Sphere: Related Content
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