Monday, June 8, 2009

Daily Credit Market Summary: June 8 - Risk Is Good

Spreads were broadly wider in the US as all the indices deteriorated (despite a big leg tighter towards the close which leaked back wider after the close). Indices typically underperformed single-names with skews widening in general as IG underperformed but narrowed the skew, HVOL outperformed but widened the skew, ExHVOL intrinsics beat and narrowed the skew, 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 International Lease Finance Corp. (-45.39bps) pushing IG 0.3bps tighter, and CIT Group Inc (+79.54bps) adding 0.45bps to IG. HVOL is more sensitive with International Lease Finance Corp. pushing it 1.31bps tighter, and CIT Group Inc contributing 2.01bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both Constellation Energy Group Inc. (-12.5bps) pushing the index 0.13bps tighter, and Fortune Brands Inc. (+10bps) adding 0.1bps to ExHVOL.

The price of investment grade credit fell 0.2% to around 98.95% of par, while the price of high yield credits fell 0.37% to around 84.13% of par. ABX market prices are lower by 0.2% of par or in absolute terms, 0.99%. Broadly speaking, CMBX market prices are lower by 0.86% of par or in absolute terms, 0.29%. Volatility (VIX) is up 0.15pts to 29.77%, with 10Y TSY selling off (yield rising) 7.3bps to 3.91% and the 2s10s curve flattened by 5.7bps, as the cost of protection on US Treasuries rose 5.4bps to 45bps. 2Y swap spreads widened 3.8bps to 52.75bps, as the TED Spread widened by 2.3bps to 0.48% and Libor-OIS deteriorated 2.1bps to 40.8bps.

The Dollar strengthened with DXY rising 0.18% to 80.816, Oil rising $0.22 to $68.66 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 0.63% today (a 0.5% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $2.9 to $952.35 as the S&P is down (939.9 -0.06%) underperforming IG credits (125bps -0.2%) while IG, which opened wider at 124bps, outperforms HY credits. IG11 and XOver11 are +4.63bps and +25.89bps respectively while ITRX11 is +6bps to 107.75bps.

The majority of credit curves flattened 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 rose +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 increasing more than expected today indicating a less systemic and more idiosyncratic spread widening/tightening at the tails.

45% of IG credits are shifting by more than 3bps and 51% of the CDX universe are also shifting significantly (less than the 5 day average of 55%). The number of names wider than the index decreased by 2 to 44 as the day's range fell to 6.25bps (one-week average 7.65bps), between low bid at 122.5 and high offer at 128.75 and higher beta credits (1.93%) outperformed lower beta credits (2.76%).

In IG, wideners outpaced tighteners by around 3-to-1, with 94 credits notably wider. By sector, CONS saw 70% names wider, ENRGs 63% names wider, FINLs 52% names wider, INDUs 93% names wider, and TMTs 91% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 107.72bps and the latter at 108.53bps.

Cross Market, we are seeing the HY-XOver spread compressing to 289.28bps from 302.2bps, and remains below the short-term average of 298.15bps, with the HY/XOver ratio falling to 1.42x, below its 5-day mean of 1.44x. The IG-Main spread compressed to 17.25bps from 18.38bps, but remains above the short-term average of 16.46bps, with the IG/Main ratio falling to 1.16x, above its 5-day mean of 1.15x.

In the US, non-financials underperformed financials as IG ExFINLs are wider by 2.8bps to 108.5bps, with 13 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 2.73bps to 149.8bps, with Brokers (worst) wider by 3.13bps to 182.08bps, Finance names (best) wider by 10.06bps to 686.08bps, and Banks wider by 3.04bps to 193.47bps. Monolines are trading wider on average by 18.18bps (0.59%) to 2506.51bps.

In IG, FINLs outperformed non-FINLs (2.51% wider to 2.6% wider respectively), with the former (IG FINLs) wider by 7.5bps to 307.7bps, with 6 of the 21 names tighter. The IG CDS market (as per CDX) is 27.9bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (97.1bps), with the bond ETFs outperforming the IG CDS market by around 6.77bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 6.35bps to 107.72bps (with ITRX FINLs -trading sideways- weaker by 4.61 to 107.88bps) and is currently trading in the middle of the week's range at 55.17%, between 112.88 to 101.37bps, and is trading sideways. Main LoVOL (trend tighter) is currently trading in the middle of the week's range at 28.29%, between 80.92 to 66.37bps. ExHVOL underperformed LoVOL as the differential decompressed to 4.93bps from 4.22bps, but remains above the short-term average of 1.28bps. The Main exFINLS to IG ExHVOL differential decompressed to 32.3bps from 30.78bps, but remains below the short-term average of 33.44bps.

Commentary courtesy of

Index/Intrinsics Changes

CDR LQD 50 NAIG091 +1.71bps to 157.9 (33 wider - 9 tighter <> 25 steeper - 24 flatter).

CDX12 IG +4.87bps to 125 ($-0.2 to $98.95) (FV +3.48bps to 140.37) (93 wider - 20 tighter <> 61 steeper - 64 flatter) - No Trend.

CDX12 HVOL +4bps to 281 (FV +8.9bps to 347.45) (23 wider - 5 tighter <> 17 steeper - 13 flatter) - No Trend.

CDX12 ExHVOL +5.14bps to 75.74 (FV +1.9bps to 80.39) (70 wider - 25 tighter <> 51 steeper - 44 flatter).

CDX11 XO +8.1bps to 319.7 (FV +8.6bps to 400.88) (25 wider - 7 tighter <> 15 steeper - 19 flatter) - No Trend.

CDX12 HY (30% recovery) Px $-0.5 to $84 / +17.5bps to 981.9 (FV +3.63bps to 905.82) (60 wider - 28 tighter <> 38 steeper - 57 flatter) - Trend Wider.

LCDX12 (65% recovery) Px $-0.25 to $84.22 / +11.92bps to 780.06 - Trend Tighter.

MCDX12 +3bps to 173bps. - No Trend.

CDR Counterparty Risk Index rose 2.9bps (1.97%) to 149.97bps (15 wider - 0 tighter).

CDR Government Risk Index rose 2.01bps (3.3%) to 62.99bps..

DXY strengthened 0.18% to 80.82.

Oil rose $0.22 to $68.66.

Gold fell $2.9 to $952.35.

VIX increased 0.15pts to 29.77%.

10Y US Treasury yields rose 7.1bps to 3.9%.

S&P500 Futures lost 0.06% to 939.9. Sphere: Related Content
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