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Daily Credit Summary: April 6: Seasonal Affective Disorder

Courtesy of Tyler Durden

After a bit of a sabbatical, we hope to resume our daily posts of credit market recaps. As always, provided by www.creditresearch.com

Market Summary

Spreads were mixed in the US with IG worse, HVOL improving, ExHVOL weaker, and HY rallying. IG trades 10.9bps tight (rich) to its 50d moving average, which is a Z-Score of -1.4s.d.. At 84bps, IG has closed tighter on only 6 days in the last 326 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. Indices typically underperformed single-names with skews mostly narrower as IG underperformed but narrowed the skew, HVOL outperformed but narrowed the skew, ExHVOL intrinsics beat and narrowed the skew, HY’s skew widened as it underperformed. 4.8% of names in IG moved more than their historical vol would imply as higher vol names underperformed lower vol names by 0.36% to -0.4%. IG’s vol is around 4.38% per 1 day period, which leaves 95 names higher vol and 30 lower vol than the index. The names having the largest impact on IG are Altria Group Inc (-10.75bps) pushing IG 0.08bps tighter, and Universal Health Services Inc (+7.25bps) adding 0.06bps to IG. HVOL is more sensitive with International Paper Company pushing it 0.23bps tighter, and SLM Corp contributing 0.21bps to HVOL’s change today. The less volatile ExHVOL’s move today is driven by both Altria Group Inc (-10.75bps) pushing the index 0.11bps tighter, and Universal Health Services Inc (+7.25bps) adding 0.07bps to ExHVOL.

Dispersion rose +0.3bps 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 9% of IG credits are shifting by more than 3bps and 19% of the CDX universe are also shifting significantly (less than the 5 day average of 27%). The number of names wider than the index stayed at 51 as the day’s range fell to 0bps (one-week average 1.76bps), between low bid at 0 and high offer at 0 and higher beta credits (0.16%) outperformed lower beta credits (0.19%). In IG, wideners outpaced tighteners by around 1-to-1, with 48 credits wider. By sector, CONS saw 29% names wider, ENRGs 59% names wider, FINLs 37% names wider, INDUs 37% names wider, and TMTs 42% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG13 exFINLs) with the former trading at 73.08bps and the latter at 83.86bps.

Cross Market, we are seeing the HY-XOver spread decompressing to 105.03bps from 102.43bps, but remains below the short-term average of 114.58bps, with the HY/XOver ratio rising to 1.25x, below its 5-day mean of 1.27x. The IG-Main spread decompressed to 7.44bps from 6.2bps, but remains below the short-term average of 8.21bps, with the IG/Main ratio rising to 1.1x, below its 5-day mean of 1.11x. Among the HY names, we see higher risk names (>500bps) outperforming lower risk (<500bps) names. Notably, there is compression between the high and low beta names. In the IG names, we see higher beta names outperforming lower beta names.

In the US, non-financials underperformed financials as IG ExFINLs are wider by 0.1bps to 83.9bps, with 35 of the 106 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 0.48bps to 97.62bps, with Brokers (worst) wider by 1.17bps to 120.5bps, Finance names (best) wider by 6.78bps to 280.33bps, and Banks wider by 0.67bps to 95.33bps. Monolines are trading tighter on average by -48.85bps (1.56%) to 2607.17bps. In IG, FINLs underperformed non-FINLs (0.33% wider to 0.12% wider respectively), with the former (IG FINLs) wider by 0.4bps to 123.5bps, with 8 of the 19 names tighter. The IG CDS market (as per CDX) is 23.6bps cheap (we’d expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (60.37bps), with the bond ETFs outperforming the IG CDS market by around 1.79bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) rallied 1.02bps to 73.08bps (with ITRX FINLs -trading sideways- weaker by 0.4 to 90.5bps) and is currently trading tight to its week’s range at 0%, between 75.44 to 73.08bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading tight to its week’s range at -0.26%, between 65.95 to 64.11bps. ExHVOL underperformed LoVOL as the differential decompressed to 3.47bps from 1.15bps, and remains above the short-term average of 3.28bps. The Main exFINLS to IG ExHVOL differential compressed to 5.5bps from 8.03bps, and remains below the short-term average of 6.03bps.

The Emerging Market index is 0.2% riskier (0.4bps wider) to 207.3bps. EM12 (Trend Tighter) is currently trading tight to its week’s range at 2.01%, between 225.9 to 206.9bps. The HY-EM spread compressed to 315bps from 316.43bps, but remains below the short-term average of 322.91bps, with the HY/EM ratio falling to 2.52x, above its 5-day mean of 2.51x.

Single-Name Movers

Today’s biggest absolute movers in IG were Universal Health Services Inc (+7.75bps), SLM Corp (+6.25bps), and Xerox Corp. (+5bps) in the wideners, and Altria Group Inc (-10.5bps), International Paper Company (-7bps), and Arrow Electronics Inc. (-3.5bps) in the tighteners. Today’s biggest percentage movers in IG were Universal Health Services Inc (+5.61%), Northrop Grumman Corp (+5.13%), and ConocoPhillips (+4.76%) in the wideners, and Altria Group Inc (-7.13%), International Paper Company (-4.98%), and Halliburton Company (-3.42%) in the tighteners. In the more financial-heavy CDR NAIG LQD 50 index, sentiment is mixed with 16 wider to 22 tighter, and 33 steeper to 15 flatter as 0 of the 50 credits have inverted curves. The biggest absolute movers were Xerox Corp. (+5bps), Computer Sciences Corp. (+3bps), and Comcast Corp. (+2.75bps) in the wideners, and Ryder System Inc. (-3bps), VF Corporation (-2.5bps), and Berkshire Hathaway Inc (-2bps) in the tighteners. The biggest percentage movers in the CDR NAIG LQD 50 were Xerox Corp. (+4.27%), Computer Sciences Corp. (+3.77%), and TJX Companies, Inc./The (+3.74%) in the wideners, and VF Corporation (-4.2%), McDonald’s Corporation (-2.53%), and Autozone Inc. (-2.16%) in the tighteners. In XO11, today’s biggest percentage movers were Sun Microsystems Inc. (+17.86%), Wendys International Inc (+5.33%), and EL Paso Corp (+3.27%) in the wideners, and CA, Inc. (-6.67%), Tyson Foods Inc. (-3.33%), and Sprint Nextel Corp. (-1.76%) in the tighteners. The largest absolute movers in XO11 were EL Paso Corp (+11.25bps), Liz Claiborne Inc. (+9.02bps), and Wendys International Inc (+8bps) in the wideners, and MGM Mirage Inc (-10.59bps), CA, Inc. (-8bps), and Sprint Nextel Corp. (-7.5bps) in the tighteners. In the names of the HY index, today’s biggest percentage movers were iStar Financial Inc. (+6.12%), Massey Energy Company (+6.04%), and AMR Corp (+4.06%) in the wideners, and Dynegy Holdings Inc. (-4.48%), RRI Energy, Inc. (-4.35%), and Level 3 Communications Inc. (-4.17%) in the tighteners. The largest absolute movers in HY were iStar Financial Inc. (+60.46bps), AMR Corp (+41.29bps), and Massey Energy Company (+22.5bps) in the wideners, and Energy Future Holdings Corp. (-56.08bps), Dynegy Holdings Inc. (-51.59bps), and Level 3 Communications Inc. (-47.4bps) in the tighteners. The CDR Counterparty Risk Index Series 2 (of brokers and banks) fell -0.46bps (or -0.46%) to 97.65bps. Credit Suisse Group (3.06bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Credit Suisse Group (4.05%) is the worst (relative) performer. HSBC Bank PLC (-15.25bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and HSBC Bank PLC (-19.06%) is the best (relative) performer. The CDR Aussie Index fell -2.68bps (or -3.62%) to 71.3bps. SingTel Optus Pty Ltd (0.09bps) is the worst (absolute) performer, whilst SingTel Optus Pty Ltd (0.17%) is the worst (relative) performer.  The CDR Asian Index fell -1.88bps (or -2.16%) to 85.05bps. Acom Co Ltd (8.04bps) is the worst (absolute) performer, whilst Acom Co Ltd (3.63%) is the worst (relative) performer. Promise Co Ltd (-36.73bps) is the best (absolute) performer, and Honda Motor Co Ltd (-15.57%) is the best (relative) performer.

Some Seasonal Stuff

We did some back-of-the-envelope seasonality tests (using BBG’s SEAG function) to try and handicap some of the recent excessively low volume strength in risk assets and commodities. Oil, rather unsurprisingly, showed notable seasonality with DEC to AUG consistently up and SEP to NOV down with the MAY-JUN period showing the largest gains (perhaps we are seeing some front-running of that here). Slightly odd but interesting is the comparison of oil to gold – how many barrels of oil to buy an ounce of gold, which we see dramatic seasonality from FEB to JUL in terms of Oil outperforming Gold, and AUG to JAN when Gold outperforms Oil – notably we are bumping along a very important flat-line at around 13 (barrels per ounce) which seasonally-based would imply a notable break up in Oil/down in Gold from here.

This is important as we look at our EM-SovX trade once again, but this time from the other side. Oil’s outperformance will help EM nations (as we have discussed previously) and with SovX the only liquid source of sovereign protection (at the moment) the 3xSovX vs EM decompression maybe worth considering (even after today’s jump in SovX).

In IG spreads, the period from MAR to JUN is typically the most positive in terms of spread compression with MAY the best (ex DEC-JAN). JUL to NOV sees the worst performance in IG credit spreads. Perhaps this is the driver of the flows into fixed income we are seeing to try and take advantage of this somewhat anomalous seasonality. In line with this we see very notable compression in VIX from MAR to MAY. MAY is very consistent in its compression (drop in vol) and so the current trend is not entirely due to our complete lack of belief in risk (perhaps). The period from JUL to OCT is notably a vol decompression period (though there is some considerable noise in that measure).

Finally, while IG spreads are seasonally strong from MAR to JUN, 10Y TSYs see there worst seasonal performance from MAR to MAY with significant rises in yield pretty consistently over this period. Quite interesting in that the amount of net debt owned by dealers into this period is rising (near recent highs) as they know a generally weak seasonal period approaches (perhaps this is clear evidence of the curve flattener that is implicit in there books – borrow short-term cheap, buy/lend long-term rich – which on a MTM basis is massively underwater as we steepen but given the lack of accounting significance remains a win-win (but perhaps this long-term cash-flow stream should be discounted at the 10Y CDS spread).

The bottom line is the low vol rally in risk assets seems to reflect well on the last yen year’s seasonal patterns and most of the relationships have notable seasonal reversals in the MAY to JUL period. This would coincide with post earning reality checks and an end to the easy comps from last year’s dump.

Index/Intrinsics Changes

  • CDR LQD 50 NAIG 0bps to 78.46 (16 wider – 22 tighter <> 27 steeper – 16 flatter).
  • CDX14 IG +0.5bps to 84 ($-0.02 to $100.66) (FV +0.15bps to 89.89) (48 wider – 43 tighter <> 66 steeper – 49 flatter) – Trend Tighter.
  • CDX14 HVOL -2.7bps to 136 (FV -0.16bps to 135.43) (10 wider – 15 tighter <> 16 steeper – 13 flatter) – Trend Tighter.
  • CDX14 ExHVOL +1.51bps to 67.58 (FV +0.25bps to 75.69) (38 wider – 57 tighter <> 45 steeper – 50 flatter).
  • CDX14 HY (30% recovery) Px $+0.04 to $99.13 / -1bps to 522.3 (FV -1.75bps to 496.33) (36 wider – 49 tighter <> 51 steeper – 49 flatter) – Trend Tighter.
  • LCDX12 (65% recovery) Px $+0.06 to $105.75 / -1.53bps to 367.88 – Trend Tighter.
  • MCDX12 +2.5bps to 130.5bps. – No Trend.
  • CDR Counterparty Risk Index fell 0.48bps (-0.49%) to 97.62bps (10 wider – 4 tighter).
  • CDR Government Risk Index rose 2.82bps (4.01%) to 73.16bps..
  • DXY strengthened 0.3% to 81.34.
  • Oil rose $0.11 to $86.73.
  • Gold rose $2.85 to $1134.75.
  • VIX fell 0.79pts to 16.48%.
  • 10Y US Treasury yields fell 3bps to 3.96%.
  • S&P500 Futures gained 0.2% to 1185.5.

 


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