Thursday, July 23, 2009

Daily Credit Summary: July 23 - Up But Not Out

Spreads were tighter in the US as all the indices improved (as HY outperformed IG with the latter making all of its moves by 11amET and flatlining the rest of the day at 2009 tights - pulling modestly wider into the close). Indices typically underperformed single-names (thanks to some tail risk compression in CIT, ILFC, and TXTFI) with skews mostly narrower as IG underperformed but narrowed the skew, HVOL underperformed but narrowed the skew, ExHVOL outperformed pushing the skew wider, XO underperformed but compressed the skew, and HY outperformed but narrowed the skew. The IG curve steepened (in the face of TSY steepening) but remains significantly steeper than intrinsics as the steepening was more in the longer-end than we had seen in the short-end recently.

The names having the largest impact on IG are Metlife, Inc. (-45bps) pushing IG 0.36bps tighter (although intraday we saw CIT rally on more technically-driven protection selling with a late day gap back wider to unch), and Safeway Inc. (+5bps) adding 0.04bps to IG (we note that many of the very tightest CDS names stormed relatively tighter today as we suspect some Super Senior tranche hedges were unwound - MCD 3bps tighter to 20/25 for example as it misses and stock tanks). HVOL is more sensitive with Metlife, Inc. pushing it 1.61bps tighter, and Canadian Natural Resources Limited contributing -0.03bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both AT&T Inc. (-15bps) pushing the index 0.16bps tighter, and Safeway Inc. (+5bps) adding 0.05bps to ExHVOL.

The price of investment grade credit rose 0.26% to around 99.23% of par, while the price of high yield credits rose 1.5% to around 87.81% of par. ABX market prices are higher (improving) by 0.39% of par or in absolute terms, 1.93%. Broadly speaking, CMBX market prices are higher (improving) by 0.26% of par or in absolute terms, 0.06%. Volatility (VIX) is down -0.04pts to 23.43%, with 10Y TSY selling off (yield rising) 11.5bps to 3.66% and the 2s10s curve steepened by 4.1bps, as the cost of protection on US Treasuries fell 1.48bps to 31.845bps. 2Y swap spreads widened 0.8bps to 44bps, as the TED Spread widened by 0.2bps to 0.32% and Libor-OIS improved 0.2bps to 30.7bps.

The Dollar strengthened with DXY rising 0.47% to 79.073 (though its intraday swing was dramatic and clearly demarked the risk-on/risk-off line), Oil rising $1.75 to $67.15 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 2.99% today (a 3.15% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $2.9 to $948.5 as the S&P rallies (965.3 1.67%) outperforming IG credits (118.5bps 0.26%) while IG, which opened tighter at 124.25bps, underperforms HY credits. IG11 and XOver11 are -6.25bps and -21bps respectively while ITRX11 is -5.12bps to 95.88bps (breaking thru 100bps for the first time in this contract - back to pre-Lehman as FINLs outperform non-FINLs over there).

Dispersion fell -5bps 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.

66% of IG credits are shifting by more than 3bps and 70% of the CDX universe are also shifting significantly (more than the 5 day average of 60%). The number of names wider than the index decreased by 2 to 40 as the day's range rose to 8bps (one-week average 5.35bps), between low bid at 117 and high offer at 125 and higher beta credits (-5.67%) outperformed lower beta credits (-4.95%).

In IG, wideners were outpaced by tighteners by around 12-to-1, with only 8 credits notably wider. By sector, CONS saw 11% names wider, ENRGs 0% names wider, FINLs 10% names wider, INDUs 7% names wider, and TMTs 0% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 97.85bps and the latter at 97.81bps.

Cross Market, we are seeing the HY-XOver spread compressing to 195.71bps from 223.54bps, and remains below the short-term average of 222.88bps, with the HY/XOver ratio falling to 1.3x, below its 5-day mean of 1.33x. The IG-Main spread compressed to 22.62bps from 23.75bps, but remains above the short-term average of 22bps, with the IG/Main ratio rising to 1.24x, above its 5-day mean of 1.21x.

In the US, non-financials outperformed financials as IG ExFINLs are tighter by 6bps to 97.8bps, with 96 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 5.85bps to 122.79bps, with Finance names (worst) tighter by 2.9bps to 947.66bps, Brokers (best) tighter by 7.06bps to 141.89bps, and Banks tighter by 8.11bps to 166.47bps. Monolines are trading tighter on average by -141.58bps (5.33%) to 2458.51bps.

In IG, FINLs underperformed non-FINLs (3.54% tighter to 5.74% tighter respectively), with the former (IG FINLs) tighter by 12.6bps to 343bps, with 19 of the 21 names tighter. The IG CDS market (as per CDX) is 30.2bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (88.28bps), with the bond ETFs outperforming the IG CDS market by around 1.96bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) rallied 4.43bps to 97.85bps (with ITRX FINLs -trending tighter- better by 7.88 to 88bps) and is currently trading tight to its week's range at 0%, between 113.94 to 97.85bps, and is trending tighter. Main LoVOL (trend tighter) is currently trading tight to its week's range at -0.01%, between 81.12 to 67.58bps. ExHVOL outperformed LoVOL as the differential compressed to -11.13bps from -7.41bps, and remains below the short-term average of -9.31bps. The Main exFINLS to IG ExHVOL differential decompressed to 41.4bps from 39.72bps, and remains above the short-term average of 40.79bps.

Commentary compliments of

Index/Intrinsics Changes:

CDR LQD 50 NAIG091 -8.62bps to 142.79 (3 wider - 46 tighter <> 34 steeper - 15 flatter).
CDX12 IG -6.25bps to 118.5 ($0.26 to $99.23) (FV -6.9bps to 136.46) (9 wider - 114 tighter <> 84 steeper - 41 flatter) - Trend Tighter.
CDX12 HVOL -6.67bps to 315 (FV -18.19bps to 382.23) (0 wider - 30 tighter <> 28 steeper - 2 flatter) - Trend Tighter.
CDX12 ExHVOL -6.12bps to 56.45 (FV -3.66bps to 69.87) (9 wider - 86 tighter <> 39 steeper - 56 flatter).
CDX11 XO -11bps to 336.4 (FV -16.57bps to 405.38) (3 wider - 31 tighter <> 30 steeper - 4 flatter) - Trend Tighter.
CDX12 HY (30% recovery) Px $+1.5 to $87.81 / -48.8bps to 848 (FV -35.59bps to 790.55) (7 wider - 87 tighter <> 73 steeper - 22 flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $+1.47 to $89.7 / -55.5bps to 567.58 - Trend Tighter.
MCDX12 -1.25bps to 168.75bps. - Trend Tighter.
CDR Counterparty Risk Index fell 5.62bps (-4.37%) to 123.03bps (1 wider - 13 tighter).
CDR Government Risk Index fell 1.25bps (-2.49%) to 48.94bps..
DXY strengthened 0.47% to 79.07.
Oil rose $1.52 to $66.92.
Gold fell $2.9 to $948.5.
VIX fell 0.04pts to 23.43%.
10Y US Treasury yields rose 11.3bps to 3.66%.
S&P500 Futures gained 1.67% to 965.3.

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