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Sunday, February 5, 2023


Daily Credit Summary: April 9 – Break Your Mortgage, Buy An Electronic Book, Learn To Read

Courtesy of Tyler Durden

Commentary compliments of www.creditresearch.com

Market Summary

Spreads were mixed in the US with IG tighter, HVOL wider, ExHVOL better, and HY rallying. IG trades 7.3bps tight (rich) to its 50d moving average, which is a Z-Score of -0.9s.d.. At 87bps, IG has closed tighter on only 15 days in the last 328 trading days (JAN09). The last five days have seen IG flat to its 50d moving average. Indices generally outperformed intrinsics with skews widening in general as IG’s skew decompressed as the index beat intrinsics, HVOL outperformed but narrowed the skew, ExHVOL outperformed pushing the skew wider, HY outperformed but narrowed the skew.

3.2% of names in IG moved more than their historical vol would imply as higher vol names outperformed lower vol names by 1% to 1.08%. 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 Vornado Realty LP (-5.25bps) pushing IG 0.04bps tighter, and American International Group, Inc. (+10bps) adding 0.08bps to IG. HVOL is more sensitive with Vornado Realty LP pushing it 0.17bps tighter, and Alcoa Inc. contributing 0.32bps to HVOL’s change today. The less volatile ExHVOL’s move today is driven by both Aetna Inc (-5bps) pushing the index 0.05bps tighter, and Constellation Energy Group Inc. (+7.5bps) adding 0.08bps to ExHVOL.

The price of investment grade credit rose 0.02% to around 100.58% of par, while the price of high yield credits rose 0.31% to around 99.06% of par. ABX market prices are higher (improving) by 0.13% of par or in absolute terms, 0.3%. Volatility (VIX) is down -0.14pts to 16.48%, with 10Y TSY selling off (yield rising) 3.5bps to 3.89% and the 2s10s curve steepened by 1.9bps, as the cost of protection on US Treasuries rose 0.41bps to 42.5bps. 2Y swap spreads tightened 0.4bps to 14bps, as the TED Spread widened by 0.4bps to 0.14% and Libor-OIS improved 0.4bps to 7.9bps.

The Dollar strengthened with DXY rising 0.1% to 81.522, Oil falling $0.33 to $85.55 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 0.49% today (a 0.28% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $1.2 to $1150.55 as the S&P rallies (1183.8 0.41%) outperforming IG credits (87bps 0.02%) while IG, which opened wider at 88.75bps, underperforms HY credits. IG13 and XOver13 are -0.25bps and +3.5bps respectively while ITRX13 is +2.13bps to 81.88bps.

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), and additionally the ratio has dropped below 0.9x which is exceptionally bearish for stocks and spreads.

Dispersion rose +1bps 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 decreasing more than expected today indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads.

16% of IG credits are shifting by more than 3bps and 33% of the CDX universe are also shifting significantly (more than the 5 day average of 26%). The number of names wider than the index increased by 1 to 52 as the day’s range rose to 4bps (one-week average 2.72bps), between low bid at 86.25 and high offer at 90.25 and higher beta credits (1.49%) underperformed lower beta credits (0.65%).

In IG, wideners outpaced tighteners by around 3-to-1, with 73 credits wider. By sector, CONS saw 47% names wider, ENRGs 76% names wider, FINLs 63% names wider, INDUs 63% names wider, and TMTs 54% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG exFINLs) with the former trading at 78.1bps and the latter at 85.52bps.

Cross Market, we are seeing the HY-XOver spread compressing to 91.09bps from 102.6bps, but remains below the short-term average of 106.04bps, with the HY/XOver ratio falling to 1.21x, below its 5-day mean of 1.25x. The IG-Main spread compressed to 5.12bps from 7.75bps, and remains below the short-term average of 7.26bps, with the IG/Main ratio falling to 1.06x, below its 5-day mean of 1.09x. Among the HY names, we see higher risk names (>500bps) underperforming lower risk (<500bps) names. In the IG names, we see higher beta names underperforming lower beta names.

In the US, non-financials outperformed financials as IG ExFINLs are wider by 1bps to 85.5bps, with 21 of the 106 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 2.67bps to 101.87bps, with Banks (worst) wider by 2bps to 99.17bps, Finance names (best) wider by 1.31bps to 282.23bps, and Brokers wider by 2.42bps to 124.25bps. Monolines are trading tighter on average by -18.37bps (0.22%) to 2558.11bps. In IG, FINLs outperformed non-FINLs (0.84% wider to 1.17% wider respectively), with the former (IG FINLs) wider by 1bps to 125.2bps, with 5 of the 19 names tighter. The IG CDS market (as per CDX) is 23.3bps cheap (we’d expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (63.7bps), with the bond ETFs underperforming the IG CDS market by around 0.36bps.

In Europe, ITRX Main ex-FINLs (underperforming FINLs) widened 2.1bps to 78.1bps (with ITRX FINLs -trending wider- weaker by 2.25 to 97bps) and is currently trading at the wides of the week’s range at 100%, between 78.1 to 73.34bps, and is trading sideways. Main LoVOL (trend wider) is currently trading at the wides of the week’s range at 100.04%, between 69.84 to 64.36bps. ExHVOL outperformed LoVOL as the differential compressed to 0.89bps from 4.2bps, and remains below the short-term average of 2.73bps. The Main exFINLS to IG ExHVOL differential decompressed to 7.36bps from 4.45bps, and remains above the short-term average of 6.21bps.

The Emerging Market index is 0.1% riskier (0.2bps wider) to 213.8bps. EM (No Trend) is currently trading at the wides of the week’s range at 76.98%, between 215.7 to 207.3bps. The HY-EM spread compressed to 310.33bps from 318.53bps, and remains below the short-term average of 317.53bps, with the HY/EM ratio falling to 2.45x, below its 5-day mean of 2.49x.

Index/Intrinsics Changes

CDR LQD 50 NAIG +1.07bps to 80.35 (33 wider – 5 tighter <> 29 steeper – 20 flatter).
CDX14 IG -0.5bps to 87 ($0.02 to $100.58) (FV +1bps to 91.56) (73 wider – 26 tighter <> 70 steeper – 49 flatter) – No Trend.
CDX14 HVOL +0.5bps to 138.5 (FV +1.64bps to 137.58) (21 wider – 6 tighter <> 19 steeper – 10 flatter) – No Trend.
CDX14 ExHVOL -0.82bps to 70.74 (FV +0.79bps to 77.21) (52 wider – 43 tighter <> 44 steeper – 51 flatter).
CDX14 HY (30% recovery) Px $+0.31 to $99.06 / -8bps to 524.1 (FV +2.22bps to 499.8) (65 wider – 30 tighter <> 58 steeper – 42 flatter) – No Trend.
LCDX12 (65% recovery) Px $+0.38 to $105.75 / -9.63bps to 359.96 – Trend Tighter.
MCDX12 +3bps to 143bps. – No Trend.
CDR Counterparty Risk Index rose 2.67bps (2.69%) to 101.87bps (14 wider – 0 tighter).
CDR Government Risk Index rose 3.06bps (4.08%) to 78.07bps..
DXY strengthened 0.1% to 81.52.
Oil fell $0.33 to $85.55.
Gold rose $1.2 to $1150.55.
VIX fell 0.14pts to 16.48%.
10Y US Treasury yields rose 3.5bps to 3.89%.
S&P500 Futures gained 0.41% to 1183.8.


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