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Daily Credit Summary: August 4 – Divergence

Courtesy of Tyler Durden

Spreads were broadly wider in the US as all the indices deteriorated (with HY underperforming IG and wider for the first time in over a week) as IG closed at its wides in direct opposition to the S&P closing at its highs. Indices typically underperformed single-names (with the IG skew now the tightest during this contract but intrinsics holding at the 118bps support level) with skews widening in general as IG underperformed but narrowed the skew, HVOL outperformed but widened the skew, ExHVOL’s skew widened as it underperformed, XO underperformed but compressed the skew, and HY’s skew widened as it underperformed.

The names having the largest impact on IG are FirstEnergy Corp (-21.5bps) pushing IG 0.17bps tighter, and CIT Group Inc (+197.51bps) adding 0.71bps to IG. HVOL is more sensitive with Caterpillar Inc. pushing it 0.54bps tighter, and CIT Group Inc contributing 3.16bps to HVOL’s change today. The less volatile ExHVOL’s move today is driven by both FirstEnergy Corp (-21.5bps) pushing the index 0.22bps tighter, and United Parcel Service Inc. (+6bps) adding 0.06bps to ExHVOL.

The price of investment grade credit fell 0.09% to around 99.45% of par, while the price of high yield credits fell 0.66% to around 90.72% of par. ABX market prices are lower by 0.29% of par or in absolute terms, 0.95%. Broadly speaking, CMBX market prices are higher (improving) by 0.37% of par or in absolute terms, 0.1%. Volatility (VIX) is down -0.67pts to 24.89%, with 10Y TSY selling off (yield rising) 5.3bps to 3.69% and the 2s10s curve steepened by 3.6bps, as the cost of protection on US Treasuries fell 1.5bps to 25bps. 2Y swap spreads tightened 0.1bps to 40.19bps, as the TED Spread tightened by 0.8bps to 0.29% and Libor-OIS deteriorated 0.1bps to 27.1bps.

The Dollar strengthened with DXY rising 0.05% to 77.681, Oil falling $0.21 to $71.37 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 1.35% today (a 0.24% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $10.28 to $967.08 as the S&P rallies (1004.5 0.38%) outperforming IG credits (113.25bps -0.09%) while IG, which opened wider at 112bps, outperforms HY credits. IG11 and XOver11 are +1.25bps and -10bps respectively while ITRX11 is +0.75bps to 90.75bps.

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 rose +14.7bps 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.

Only 28% of IG credits are shifting by more than 3bps and 39% of the CDX universe are also shifting significantly (less than the 5 day average of 50%). The number of names wider than the index stayed at 38 as the day’s range fell to 3.75bps (one-week average 4.7bps), between low bid at 110.75 and high offer at 114.5 and higher beta credits (0.27%) underperformed lower beta credits (-0.01%).

In IG, wideners and tighteners were balanced at around 1-to-1, with 57 credits notably wider. By sector, CONS saw 62% names wider, ENRGs 50% names wider, FINLs 52% names wider, INDUs 39% names wider, and TMTs 17% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 92.31bps and the latter at 82.17bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 162.62bps from 132.79bps, and remains above the short-term average of 159.25bps, with the HY/XOver ratio rising to 1.27x, above its 5-day mean of 1.26x. The IG-Main spread decompressed to 22.5bps from 21bps, and remains above the short-term average of 22.26bps, with the IG/Main ratio rising to 1.25x, above its 5-day mean of 1.25x.

In the US, non-financials outperformed financials as IG ExFINLs are tighter by 0.2bps to 82.2bps, with 37 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 1.92bps to 108.8bps, with Brokers (worst) wider by 2.75bps to 129.51bps, Finance names (best) wider by 29.62bps to 994.76bps, and Banks wider by 1.43bps to 149.97bps. Monolines are trading tighter on average by -73.68bps (0.09%) to 4278.78bps.

In IG, FINLs underperformed non-FINLs (2.01% wider to 0.19% tighter respectively), with the former (IG FINLs) wider by 6.1bps to 312bps, with 6 of the 21 names tighter. The IG CDS market (as per CDX) is 28bps cheap (we’d expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (85.29bps), with the bond ETFs outperforming the IG CDS market by around 1.3bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 0.43bps to 92.31bps (with ITRX FINLs -trading sideways- weaker by 2 to 84.5bps) and is currently trading in the middle of the week’s range at 30.56%, between 97.56 to 90bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading at the wides of the week’s range at 92.31%, between 68.33 to 63.18bps. ExHVOL underperformed LoVOL as the differential decompressed to -6.71bps from -8.37bps, and remains above the short-term average of -7.98bps. The Main exFINLS to IG ExHVOL differential compressed to 31.09bps from 32.67bps, but remains below the short-term average of 34.3bps.

Commentary compliments of

Index/Intrinsics Changes:

  • CDR LQD 50 NAIG091 -0.71bps to 130.11 (27 wider – 15 tighter <> 27 steeper – 21 flatter).
  • CDX12 IG +2.25bps to 113.25 ($-0.09 to $99.45) (FV +0.83bps to 118.47) (56 wider – 44 tighter <> 70 steeper – 54 flatter) – No Trend.
  • CDX12 HVOL +3bps to 278 (FV +4.08bps to 329.49) (17 wider – 10 tighter <> 14 steeper – 16 flatter) – Trend Tighter.
  • CDX12 ExHVOL +2.01bps to 61.22 (FV -0.1bps to 60.46) (39 wider – 56 tighter <> 39 steeper – 56 flatter).
  • CDX11 XO +6.2bps to 300 (FV -4.18bps to 312.49) (12 wider – 20 tighter <> 19 steeper – 15 flatter) – Trend Tighter.
  • CDX12 HY (30% recovery) Px $-0.63 to $90.75 / +19bps to 757.3 (FV -8.94bps to 694.63) (34 wider – 49 tighter <> 53 steeper – 35 flatter) – Trend Tighter.
  • LCDX12 (65% recovery) Px $-0.04 to $92 / +1.34bps to 483.85 – Trend Tighter.
  • MCDX12 +2bps to 162bps. – No Trend.
  • CDR Counterparty Risk Index rose 2bps (1.87%) to 108.88bps (11 wider – 3 tighter).
  • CDR Government Risk Index fell 1.12bps (-2.82%) to 38.5bps..
  • DXY strengthened 0.05% to 77.68.
  • Oil fell $0.21 to $71.37.
  • Gold rose $10.28 to $967.08.
  • VIX fell 0.67pts to 24.89%.
  • 10Y US Treasury yields rose 5.1bps to 3.69%.
  • S&P500 Futures gained 0.38% to 1004.5.


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