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Daily Credit Summary: June 4 – More Straws, Less Camels

Courtesy of Tyler Durden

Commentary courtesy of www.creditresearch.com

Spreads were notably wider this week, thanks in large part to Friday’s sell-off, as HY handsomely underperformed IG though both equity and credit ended almost perfectly in line (based on beta-adjusted changes) at the index level. Sovereigns and FINLs were the big losers on the week (aside from the oil-spill idiosyncrasies) but there was a clear theme of derisking systemically (indices underperforming intrinsics), hedging macro overlays (CDS indices underperforming cash bond indices), and surprisingly equal weakness in EUR and US risk while Asian sovereigns outperformed as Asian corporates underperformed.

Low volumes in bond trading (based on TRACE data) combined with rising anxiety and underperformance in IG and HY indices suggests some preparation is under way (along with more fund outflows in HY) and given the lack of dip-buying (yet), we suspect the trend wider remains the path of least resistance for now. For now, while at the index-level equity is only modestly expensive relative to credit (admittedly with a significant basis risk), from the bottom-up expensive single-name stocks (relative to credit and vol) continue to outweigh cheap by a very large margin.

Flattening in the TSY curve along with rising funding rates (whether EURIBOR/EUR Libor decompression, OIS-Libor, TED, ECP (US vs EUR), or decoupling between JPY and the short-end of the TSY curve, credit markets appear to be sending smoke signals similar in velocity to the 07/08 period and once again Fed/ECB balance sheets are running the risk.

As a reminder, for anyone considering this a buying opportunity (other than for a swing trade) based on rebalancing or mean-reversion should note two things: fund outflows are picking up for risk assets, and, even more importantly in our view, risk budgets will mean that allocations will be materially lower (in their wondrously pro-cyclical manner) as we note IG’s three-month realized vol is its highest since NOV08 and HY’s three-month realized vol is its highest since OCT07 (higher still if we adjust for intraday vol)!

We remind readers of some of the analysis we did a month or two back when looking for systemic hedges that relate to realized vol rebased to DV01 changes vs carry costs etc…this shift in vol makes for ugly reading for anyone adding risk currently – just as the huge compression in vol helped accelerate weightings into these assets.

One last point of interest is that IG is about to see a very important cross in its moving averages. For the first time since MAY07, the 50-day average of IG on-the-run spreads is about to cross wider than the 200-day average with both on an upward trajectory. These kind of moves tend to get the equity technical analyst crowd going and we thought it was interesting enough to note. Stops (based on our pivots) for IG and HY shorts here are 118.5bps or 113.25bps and 640bps or 612bps respectively dependent on your risk tolerance). On the other side, 128.75bps and 696bps respectively represent near-term resistance for any longs looking to place stops here.

On a brighter note, we remind all clients that it is now only 6 days to the World Cup, squads have been selected, and most teams are acclimating to the South African weather. Sadly (well not really for us who do not like Chelsea) for the Ivory Coast, Didier Drogba broke his arm and is out and really sadly England’s Rio Ferdinand is OUT due to a knee injury. Spain had some upside today (after a terrible market day) with a win 1-0 over South Korea. Perhaps the most notable result was Mexico’s defeat 2-1 of Italy (shame I hear you cry) and China beating France 1-0!

Market Summary
Spreads were broadly wider in the US as all the indices deteriorated. Indices typically underperformed single-names with skews widening in general as IG’s skew widened as it underperformed, HVOL outperformed but narrowed the skew, ExHVOL’s skew widened as it underperformed, HY’s skew widened as it underperformed. IG’s vol is around 160.47% per week, with average IG single-name vol around 74.83%.

The names having the largest impact on IG are American International Group, Inc. (-27.5bps) pushing IG 0.19bps tighter, and Anadarko Petroleum Corp. (+194.19bps) adding 1.42bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 0.83bps tighter, and Alcoa Inc. contributing 2.02bps to HVOL’s change today. The less volatile ExHVOL’s move today is driven by both Universal Health Services Inc (-17.46bps) pushing the index 0.17bps tighter, and Anadarko Petroleum Corp. (+194.19bps) adding 1.85bps to ExHVOL.

The price of investment grade credit fell 0.35% to around 98.9% of par, while the price of high yield credits fell 1.195% to around 93.63% of par. ABX market prices are higher (improving) by 0.1% of par or in absolute terms, 0.51%. Volatility (VIX) is up 3.41pts to 35.48%, with 10Y TSY rallying (yield falling) 9bps to 3.21% and the 2s10s curve flattened by 5bps, as the cost of protection on US Treasuries rose 6.37bps to 43.37bps. 2Y swap spreads widened 1.6bps to 46.56bps, as the TED Spread widened by 3.5bps to 0.42% and Libor-OIS deteriorated 1.2bps to 31.2bps.

The Dollar strengthened with DXY rising 2.03% to 88.233, Oil falling $2.46 to $71.51 (underperforming the dollar as the value of Oil (rebased to the value of gold) fell by 3.76% today (a 1.3% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $5.52 to $1219.9 as the S&P is down (1066.1 -2.06%) underperforming IG credits (125.5bps -0.36%) while IG, which opened the shortened week gap wider from last Friday at 122.5bps, outperforms HY credits. IG13 and XOver13 are +7.26bps and +35.66bps respectively while ITRX13 is +9.63bps to 127.25bps.

Dispersion rose +9.6bps in IG. Broad market dispersion is less than historically expected given current spread levels, pointing to a less sanguine view of credits as investors discriminate less between names, with dispersion decreasing more than expected this week indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads.

54% of IG credits are shifting by more than 3bps and 62% of the CDX universe are also shifting significantly (more than the 5 day average of 53%). The number of names wider than the index decreased by 1 to 43 as the week’s range fell to only 13.25bps (notably lower than recent weeks), between low bid at 113.25 and high offer at 126.5 and higher beta credits (5.53%) outperformed lower beta credits (5.87%) as we closed at the week’s wides in IG and HY.

In IG, wideners outpaced tighteners by around 3-to-1, with 96 credits wider. By sector, CONS saw 66% names wider, ENRGs 94% names wider, FINLs 95% names wider, INDUs 59% names wider, and TMTs 88% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) outperformed US (IG exFINLs) with the former trading at 113.31bps and the latter at 110.46bps.

Cross Market, we are seeing the HY-XOver spread compressing to 78.34bps from 80.81bps, but remains above the short-term average of 75.07bps, with the HY/XOver ratio falling to 1.13x, above its 5-day mean of 1.13x. The IG-Main spread compressed to -1.75bps from -0.69bps, but remains above the short-term average of -2.06bps, with the IG/Main ratio falling to 0.99x, above its 5-day mean of 0.98x. Among the HY names, we see higher risk names (>500bps) underperforming lower risk (<500bps) names. In the IG names, we see higher beta names outperforming lower beta names.

In the US, non-financials outperformed financials as IG ExFINLs are wider by 6.9bps to 110.5bps, with 27 of the 106 names tighter. while among US Financials, the CDR Counterparty Risk Index rose 15.8bps to 170.35bps, with Banks (worst) wider by 11.72bps to 141.83bps, Brokers (best) wider by 7.41bps to 205.67bps, and Finance names wider by 21.15bps to 409.37bps. Monolines are trading wider on average by 166.67bps (6.09%) to 2907.75bps.

In IG, FINLs underperformed non-FINLs (7.81% wider to 6.63% wider respectively), with the former (IG FINLs) wider by 14.5bps to 200.2bps, with 1 of the 19 names tighter. The IG CDS market (as per CDX) is 16.8bps cheap (we’d expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (108.74bps), with the bond ETFs outperforming the IG CDS market by around 2.97bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) widened 6.68bps to 113.31bps (with ITRX FINLs -trending wider- weaker by 21.4 to 183bps) and is currently trading at the wides of the week’s range at 100%, between 113.31 to 106.35bps, and is trending wider. Main LoVOL (trend wider) is currently trading at the wides of the week’s range at 100.02%, between 107.59 to 98.25bps. ExHVOL outperformed LoVOL as the differential compressed to -1.01bps from -0.37bps, but remains above the short-term average of -2.33bps. The Main exFINLS to IG ExHVOL differential compressed to 6.73bps from 7.86bps, but remains below the short-term average of 9.27bps.

The Emerging Market index is 3.4% riskier (9.6bps wider) to 290.2bps. EM (No Trend) is currently trading at the wides of the week’s range at 99.71%, between 290.2 to 274.8bps. The HY-EM spread decompressed to 379.18bps from 355.63bps, and remains above the short-term average of 364.89bps, with the HY/EM ratio rising to 2.31x, above its 5-day mean of 2.3x.

Index/Intrinsics Changes (Friday-to-Friday)
CDR LQD 50 NAIG +5.79bps to 108.19 (40 wider – 9 tighter <> 23 steeper – 27 flatter).
CDR Counterparty Risk Index rose 15.54bps (10.05%) to 170.09bps (14 wider – 0 tighter).
CDR Government Risk Index rose 22.75bps (21.73%) to 127.42bps..
CDX14 IG +8.57bps to 125.5 ($-0.35 to $98.9) (FV +8.17bps to 123.85) (96 wider – 29 tighter <> 67 steeper – 58 flatter) – Trend Wider.
CDX14 HVOL +15.55bps to 190 (FV +11.31bps to 0) (28 wider – 2 tighter <> 16 steeper – 14 flatter) – Trend Wider.
CDX14 ExHVOL +6.37bps to 105.13 (FV +7.21bps to 102.78) (68 wider – 27 tighter <> 44 steeper – 51 flatter).
CDX14 HY (30% recovery) Px $-1.2 to $93.63 / +33.2bps to 669.3 (FV +23.3bps to 612.65) (89 wider – 9 tighter <> 35 steeper – 65 flatter) – Trend Wider.
LCDX14 (70% recovery) Px $-0.61 to $94.5 / +18.12bps to 404.21 – Trend Wider.
MCDX14 +8.41bps to 174.908840182648bps. – Trend Wider.
ITRX13 Main +9.57bps to 127.19bps (FV+12.4bps to 128.45bps).
ITRX13 Xover +35.66bps to 591bps (FV+36.62bps to 561.11bps).
ITRX13 FINLs +21.4bps to 183bps (FV+22.87bps to 186.14bps).
DXY strengthened 2.03% to 88.23.
Oil fell $2.46 to $71.51.
Gold rose $5.52 to $1219.9.
VIX increased 3.41pts to 35.48%.
10Y US Treasury yields fell 9bps to 3.21%.
S&P500 Futures lost 2.06% to 1066.1.

Single-Name Movers (Friday-to-Friday)
This week’s biggest absolute movers in IG were Anadarko Petroleum Corp. (+194.19bps), Transocean Ltd. (+186.89bps), and Alcoa Inc. (+65.57bps) in the underperformers, and American International Group, Inc. (-25bps), Universal Health Services Inc (-17.46bps), and Newell Rubbermaid Inc. (-6.58bps) in the outperformers. This week’s biggest percentage movers in IG were Anadarko Petroleum Corp. (+118.01%), Transocean Ltd. (+73.83%), and Halliburton Company (+43.03%) in the underperformers, and Black & Decker Corporation (-8.84%), Universal Health Services Inc (-6.07%), and American International Group, Inc. (-5.18%) in the outperformers.

In the more financial-heavy CDR NAIG LQD 50 index, sentiment is mixed with 40 wider to 9 tighter, and 23 steeper to 27 flatter as 10 of the 50 credits have inverted curves. The biggest absolute movers were Allstate Corp (+25.04bps), Citigroup Inc (+20.72bps), and ACE Ltd. (+20bps) in the underperformers, and VF Corporation (-6bps), Computer Sciences Corp. (-4.19bps), and Autozone Inc. (-3.34bps) in the outperformers. The biggest percentage movers in the CDR NAIG LQD 50 were Allstate Corp (+27.83%), Chubb Corp. (+21.94%), and ACE Ltd. (+20%) in the underperformers, and VF Corporation (-7.27%), Autozone Inc. (-4.13%), and Computer Sciences Corp. (-4.02%) in the outperformers.

In Main, the biggest percentage movers were BP PLC (+115.01%), Total SA (+50.83%), and Gas Natural SDG SA (+40.11%) in the underperformers, and Rolls-Royce Group PLC (-7.79%), Portugal Telecom International Finance B.V. (-2.67%), and Svenska Cellulosa AB SCA (-2.32%) in the outperformers.The largest absolute movers in Main were BP PLC (+116.08bps), Gas Natural SDG SA (+68.61bps), and Banco Espirito Santo SA (+65.08bps) in the underperformers, and Rolls-Royce Group PLC (-8.95bps), Portugal Telecom International Finance B.V. (-5bps), and Alstom (-2.5bps) in the outperformers.

The biggest percentage movers in XOver were BCM Ireland Finance Ltd (+24.92%), Valeo SA (+23.14%), and Seat Pagine Gialle SpA (+17.41%) in the underperformers, and Cognis GmbH (-14.29%), Nielsen Company/The (-14.25%), and Deutsche Lufthansa AG (-4.07%) in the outperformers.The largest absolute movers in XOver were BCM Ireland Finance Ltd (+515.56bps), Seat Pagine Gialle SpA (+350.38bps), and ONO Finance, PLC (+209.71bps) in the underperformers, and Nielsen Company/The (-71.83bps), Ineos Group Holdings plc (-29.37bps), and Cognis GmbH (-25bps) in the outperformers.

In the names of the HY index, this week’s biggest percentage movers were Pride International Inc. (+26.23%), RadioShack Corp (+16.9%), and KB Home (+13.76%) in the underperformers, and Harrah’s Operating Co Inc (-10.53%), Neiman-Marcus Group Inc. (-2.14%), and Radian Group Inc (-1.68%) in the outperformers. The largest absolute movers in HY were Clear Channel Communications Inc (+148.49bps), Mediacom LLC (+109.39bps), and K Hovnanian Enterprises, Inc. (+102.62bps) in the underperformers, and Harrah’s Operating Co Inc (-148.68bps), Neiman-Marcus Group Inc. (-16.78bps), and Radian Group Inc (-11.94bps) in the outperformers.

The CDR Counterparty Risk Index Series 2 (of brokers and banks) rose 15.54bps (or 10.05%) to 170.09bps. Credit Suisse Group (27.38bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Credit Suisse Group (20.66%) is the worst (relative) performer. Merrill Lynch & Co., Inc. (1.72bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and Merrill Lynch & Co., Inc. (0.89%) is the best (relative) performer.

The CDR Aussie Index rose 3.89bps (or 3.59%) to 112.31bps. QBE Insurance Group Limited (13.37bps) is the worst (absolute) performer, whilst QBE Insurance Group Limited (7.64%) is the worst (relative) performer. SingTel Optus Pty Ltd (-2bps) is the best (absolute) performer, and SingTel Optus Pty Ltd (-2.5%) is the best (relative) performer.


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