Wednesday, June 10, 2009

Daily Credit Market Summary: June 10 - Basis Compression

Spreads were broadly wider in the US as all the indices deteriorated (albeit with a wide range day and spreads pushing significantly wider open-to-close). Indices typically underperformed single-names with skews mostly narrower as IG underperformed but narrowed the skew(as we note the cash-cds basis on high-quality credits collapsed this week perhaps putting compression pressure on synthetic spreads as prop desks unwind), 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 American International Group, Inc. (-118.16bps) pushing IG 0.66bps tighter, and FirstEnergy Corp (+33.25bps) adding 0.26bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 2.9bps tighter, and Carnival Corp. contributing 0.3bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both AT&T Inc. (-10bps) pushing the index 0.1bps tighter, and FirstEnergy Corp (+33.25bps) adding 0.33bps to ExHVOL.

The price of investment grade credit fell 0.08% to around 98.93% of par, while the price of high yield credits fell 0.25% to around 84.38% of par. ABX market prices are lower by 0.06% of par or in absolute terms, 0.41%. Broadly speaking, CMBX market prices are higher (improving) by 0.33% of par or in absolute terms, 0.11%. Volatility (VIX) is up 0.19pts to 28.56%, with 10Y TSY selling off (yield rising) 8.4bps to 3.94% and the 2s10s curve steepened by 3.5bps, as the cost of protection on US Treasuries fell 0.44bps to 42.5bps. 2Y swap spreads tightened 0.8bps to 47.5bps, as the TED Spread tightened by 1.1bps to 0.47% and Libor-OIS improved 0.2bps to 42.3bps.

The Dollar strengthened with DXY rising 0.5% to 80.242, Oil rising $1.19 to $71.2 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 1.63% today (a 2.2% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $0.7 to $955.48 as the S&P is down (938.3 -0.14%) underperforming IG credits (125.5bps -0.08%) while IG, which opened tighter at 119.5bps, outperforms HY credits. IG11 and XOver11 are +0.25bps and -15bps respectively while ITRX11 is -2.5bps to 105.25bps.

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).

Dispersion fell 9.6bps 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 increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.

Only 38% of IG credits are shifting by more than 3bps and 50% of the CDX universe are also shifting significantly (more than the 5 day average of 48%). The number of names wider than the index decreased by 4 to 41 as the day's range rose to 12bps (one-week average 8.23bps), between low bid at 117.5 and high offer at 129.5 and higher beta credits (-0.88%) underperformed lower beta credits (-1.92%).

In IG, wideners were outpaced by tighteners by around 4-to-1, with only 24 credits notably wider. By sector, CONS saw 16% names wider, ENRGs 56% names wider, FINLs 5% names wider, INDUs 14% names wider, and TMTs 17% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG12 exFINLs) with the former trading at 105.5bps and the latter at 105.29bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 292.55bps from 268.87bps, but remains below the short-term average of 294.41bps, with the HY/XOver ratio rising to 1.43x, above its 5-day mean of 1.43x. The IG-Main spread decompressed to 20.25bps from 15.75bps, and remains above the short-term average of 16.92bps, with the IG/Main ratio rising to 1.19x, above its 5-day mean of 1.16x.

In the US, non-financials underperformed financials as IG ExFINLs are tighter by 1.1bps to 105.3bps, with 63 of the 104 names tighter, while among US Financials, the CDR Counterparty Risk Index fell 5.26bps to 141.94bps, with Banks (worst) tighter by 4.61bps to 183.83bps, Brokers (best) tighter by 6.38bps to 173.33bps, and Finance names tighter by 21.2bps to 654.08bps. Monolines are trading tighter on average by -156.99bps (6.05%) to 2340.4bps.

In IG, FINLs outperformed non-FINLs (3.24% tighter to 1.02% tighter respectively), with the former (IG FINLs) tighter by 9.9bps to 295bps, with 18 of the 21 names tighter. The IG CDS market (as per CDX) is 32.4bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (93.09bps), with the bond ETFs outperforming the IG CDS market by around 5.67bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 2.31bps to 105.5bps (with ITRX FINLs -trading sideways- better by 3.28 to 104.25bps) and is currently trading in the middle of the week's range at 50.74%, between 109.51 to 101.37bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading in the middle of the week's range at 32.72%, between 73 to 66.37bps. ExHVOL underperformed LoVOL as the differential decompressed to 6.59bps from 4.14bps, but remains above the short-term average of 3.62bps. The Main exFINLS to IG ExHVOL differential compressed to 30.37bps from 32.78bps, but remains below the short-term average of 32.87bps.

Commentary compliments of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 -4.44bps to 150.13 (10 wider - 37 tighter <> 17 steeper - 31 flatter).

CDX12 IG +2bps to 125.5 ($-0.08 to $98.93) (FV -2.68bps to 135.58) (26 wider - 84 tighter <> 38 steeper - 87 flatter) - No Trend.

CDX12 HVOL +8bps to 285 (FV -7.89bps to 333.23) (6 wider - 23 tighter <> 9 steeper - 21 flatter) - No Trend.

CDX12 ExHVOL +0.11bps to 75.13 (FV -1.15bps to 77.91) (20 wider - 75 tighter <> 66 steeper - 29 flatter).

CDX11 XO +3.1bps to 322.5 (FV -4.82bps to 395.74) (5 wider - 25 tighter <> 16 steeper - 17 flatter) - No Trend.

CDX12 HY (30% recovery) Px $-0.25 to $84.38 / +8.7bps to 967.6 (FV -20.07bps to 870.35) (15 wider - 74 tighter <> 54 steeper - 40 flatter) - Trend Tighter.

LCDX12 (65% recovery) Px $-0.4 to $84.3 / +18.88bps to 779.1 - Trend Tighter.

MCDX12 0bps to 172bps. - Trend Tighter.

CDR Counterparty Risk Index fell 5.76bps (-3.91%) to 141.44bps (2 wider - 13 tighter).

CDR Government Risk Index fell 0.84bps (-1.32%) to 62.71bps..

DXY strengthened 0.5% to 80.24.

Oil rose $1.19 to $71.2.

Gold rose $0.7 to $955.48.

VIX increased 0.19pts to 28.56%.

10Y US Treasury yields rose 8.4bps to 3.94%.

S&P500 Futures lost 0.14% to 938.3. Sphere: Related Content
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