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Thursday, March 28, 2024

Weekly Credit Summary

Courtesy of Tyler Durden

Commentary courtesy of www.creditresearch.com

Spreads closed considerably wider today, with the biggest close-to-close widening since 6/22, as HY dramatically underperformed (pushing back above 600bps for the first time since 7/7) with the macro fears that we have been discussing crystallized and micro issues seem to be turning the same way.

Dismal confidence data along with more worrisome in-/de-flation data set the early tone and stocks and spreads pushed quickly lower (wider) out of the gate. The eight day rally that we have seen, and we have been vociferous in our view of what caused this and what was under the surface, was an exact mirror of the rally a month ago in credit. The swing from wides to tights from 6/10 to 6/21 (8 trading days) was 132 to 104.125 (which was the swing tights since 5/10’s 95bps). The recent swing from 7/1 wides to 7/13 tights (126.755 to 106.5) was also over 8 trading days and the same pattern of index outperformance of intrinsics was very evident – which supports our thesis of macro hedge unwinds and underlying selling.

http://www.scribd.com/doc/34436153/IG-OHLC

On The Week

Spreads were wider on the week in all the major credit indices with Friday’s rapid derisking the main culprit and running well ahead of underlying single-names. The rush for a liquid macro cover as anxiety re-appeared sets the stage for another round of single-name CDS and bond derisking and with decent fund flows in the rear-view mirror we suspect the best is behind us for the next leg. HY underperformed IG on the week as did IG ratings cohorts relative to HY cohorts which again supports a more deflationist view of modest reach-for-yield and fixed income safety over HY’s levered asset devaluation. It is perhaps notable once again the relative non-existence of HY issuance this week – even as spreads screamed tighter for over a week.

With single-names relatively thinly traded today, we did not see them join the index decompression later in the day on Friday and so week-over-week comparisons are perhaps a little unclear but it certainly offers up a lot of food for thought for dealers reracking on Monday. While IG intrinsics were 3-4bps tighter on the week and IG 3bps wider, the skew is going out pretty much flat while Friday’s underperformance of HY over intrinsics accounts for much of the index’s cheapness to intrinsics (which we would expect to be quickly filled by opening quotes on Monday).

http://www.scribd.com/doc/34439498/CDR-CSA-20100716

Its clear that the majority of single-name moves for the week are in the lower left hand corner (equity underperforming credit) as we note 51.6% of all names are in this quadrant. This, we believe, is mostly related to the relative thinness of CDS this afternoon relative to stocks as derisking took off but was very focused in the indices for credit. Financials agreed and both deteriorated approximately in line with one another and it is perhaps also notable that Energy and Utilities saw credit significantly outperform stocks on the week as a safer harbor of both Utes and IG credit seemed to trump stocks.

ITRX FINLs underperformed on the week after a few days of decent performance but we believe this is the start of selling on the news into stress tests after some buying rumors since 7/2. IG and Main moved around the same on the week but HY notably underperformed XOver from last Friday’s close but we note that FINLs underperformed ExFINLs by around 7bps on the week, starting to make up the gap between this differential and SOvX that we have been looking for (this still looks good for a short-term trade entry).

Main ExFINLs trades 9bps wide to IG ExFINLs as the latter widened 3bps and the former tightened 5bps this week but once again we suspect this will normalize fast on Monday as dealer’s runs arrive.

Bottom line was that TSYs certainly signaled more weakness than stocks in the future (and they are typically right) and credit index relative to intrinsics and cash did not seem to confirm the broad performance in stocks. The dichotomy between macro weakness and hopeful micro strength met its maker on Friday as derisking hit hard on decent volumes and we await earnings next week and more event risk. Watch bond volumes also as they slowed again today after picking up in IG recently. It makes sense for relative IG outperformance of HY in a deflationary environment but if we continue to see HY index underperformance and thin HY bond/CDS volumes then that bodes very badly for underlying portfolios as inevitably bids and offers will meet (and for now it appears in HY that they can’t find a happy medium).

Index/Intrinsics Changes (Friday-to-Friday)
CDR LQD 50 NAIG +0.38bps to 102.11 (21 wider – 26 tighter <> 23 steeper – 27 flatter).
CDR Counterparty Risk Index rose 0.44bps (0.32%) to 140.14bps (8 wider – 6 tighter).
CDR Government Risk Index rose 1.27bps (1.29%) to 100bps..
CDX14 IG +3.13bps to 113.13 ($-0.12 to $99.43) (FV -3.98bps to 114.56) (33 wider – 85 tighter <> 58 steeper – 66 flatter) – No Trend.
CDX14 HVOL -8.62bps to 154.78 (FV -2.06bps to 0) (9 wider – 20 tighter <> 12 steeper – 18 flatter) – Trend Tighter.
CDX14 ExHVOL +6.84bps to 99.98 (FV -4.37bps to 95.2) (24 wider – 71 tighter<> 49 steeper – 46 flatter).
CDX14 HY (30% recovery) Px $-0.88 to $96 / +23.3bps to 603 (FV -15.02bps to 584.98) (20 wider – 80 tighter <> 43 steeper – 56 flatter) – Trend Wider.
LCDX14 (70% recovery) Px $-0.06 to $95.825 / +1.62bps to 363.59 – Trend Wider.
MCDX14 -6.5bps to 225bps. – Trend Tighter.
ITRX13 Main +3.5bps to 117.25bps (FV+1.03bps to 118.39bps).
ITRX13 Xover +5bps to 531bps (FV-2.89bps to 523.82bps).
ITRX13 FINLs +7.75bps to 137.5bps (FV+2.08bps to 142.12bps).
DXY weakened 1.65% to 82.56.
Oil fell $0.32 to $75.77.
Gold fell $18.6 to $1193.
VIX increased 1.27pts to 26.25%.
10Y US Treasury yields fell 13.1bps to 2.93%.
S&P500 Futures lost 0.88% to 1063.1.

Market Summary (Friday-to-Friday)

Spreads were mixed in the US this week with IG worse, HVOL improving, ExHVOL weaker, and HY selling off. Indices typically underperformed single-names with skews widening in general as IG underperformed but narrowed the skew, HVOL outperformed but narrowed the skew, ExHVOL’s skew widened as it underperformed, HY’s skew widened as it underperformed.

Comparing the relative HY and IG moves to their 50-day rolling beta, we see that HY underperformed by around 7.7bps (or 33%). Interestingly, based on short-run empirical betas between IG, HY, and the S&P, stocks outperformed HY by an equivalent 9.3bps (~ 40%), and stocks outperformed IG by an equivalent 0.4bps (~ 13%) – (implying IG underperformed HY (on an equity-adjusted basis)).

The names having the largest impact on IG are Transocean Ltd. (-122.5bps) pushing IG 0.88bps tighter, and Allstate Corp (+14.59bps) adding 0.12bps to IG. HVOL is more sensitive with International Paper Company pushing it 0.64bps tighter, and SLM Corp contributing 0.32bps to HVOL’s change today. The less volatile ExHVOL’s move today is driven by both Transocean Ltd. (-122.5bps) pushing the index 1.15bps tighter, and Allstate Corp (+14.59bps) adding 0.15bps to ExHVOL.

The price of investment grade credit fell 0.12% to around 99.43% of par, while the price of high yield credits fell 0.88% to around 96% of par. ABX market prices are higher (improving) by 0.16% of par or in absolute terms, 0.18%. Volatility (VIX) is up 1.27pts to 26.25%, with 10Y TSY rallying (yield falling) 13.1bps to 2.93% and the 2s10s curve flattened by 9.1bps, as the cost of protection on US Treasuries rose 1.52bps to 38.14bps. 2Y swap spreads tightened 7.2bps to 24.44bps, as the TED Spread tightened by 0.6bps to 0.38% and Libor-OIS improved 0.1bps to 33.3bps.

The Dollar weakened with DXY falling 1.65% to 82.561, Oil falling $0.32 to $75.77 (underperforming the dollar as the value of Oil (rebased to the value of gold) rose by 1.13% today (a 2.07% drop in the relative (dollar adjusted) value of a barrel of oil), and Gold dropping $18.6 to $1193 as the S&P is down (1063.1 -0.88%) underperforming IG credits (113.13bps -0.12%) while IG, which opened wider at 108.25bps, outperforms HY credits. IG13 and XOver13 are -0.25bps and +5bps respectively while ITRX13 is +3.5bps to 117.25bps. Dispersion fell -7.3bps in IG.

54% of IG credits are shifting by more than 3bps and 41% of the CDX universe are also shifting significantly (less than the 5 day average of 49%). The number of names wider than the index decreased by 1 to 52 as the week’s range rose to 7.5bps (one-week average 7bps), between low bid at 106.5 and high offer at 114 and higher beta credits (-1.41%) underperformed lower beta credits (-3.1%).

In IG, tighteners outpaced wideners by around 3-to-1, with 33 credits wider. By sector, CONS saw 18% names wider, ENRGs 6% names wider, FINLs 63% names wider, INDUs 15% names wider, and TMTs 38% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG exFINLs) with the former trading at 112.19bps and the latter at 103.6bps.

Index Internals (Friday-to-Friday)
Within the 240 name CDX Index Universe, sentiment is more bullish, with only 53 (23%) wideners to 165 (71%) tighteners and 101 (43%) steepeners to 122 (52%) flatteners (3.1 tighteners for every widener). Among this universe, there are 11 credits with a bullish trend, and 1 with a bearish trend (based on the previous five days trading action). The market’s general sentiment is evident as we note that 54 credits are at the widest in their 5-day range currently, and 23 are at their tightest. Notably, from the 240 name index universe, there are 42 (~18%) credits that have inverted curves, with an average inversion of 30% of 5Y CDS.

Within the IG universe, dispersion overall has fallen -7.3bps to 89.3bps, as the wings of the distribution (10-90%) decreased less than the centre (25-75%) of the distribution. The distribution shifted non-linearly as the 50th percentile increased the most (-2bps /-2.19%) to 89.5bps, and the 90th percentile increased the least (-8.2bps /-3.9%) to 202.9bps.

IG Sector Moves and Betas (Friday-to-Friday)
In IG, FINL (the worst sector) out-performed IG, moving (on average) 1.4bps (0.79%) wider to an average of 177.5bps. TMT (the second weakest sector) out-performed IG, moving (on average) 0.3bps (0.25%) wider to an average of 101.1bps. INDU (the median sector) out-performed IG, moving (on average) 2.8bps (2.74%) tighter to an average of 99.3bps. CONS (the second best sector) out-performed IG, moving (on average) 2.7bps (2.9%) tighter to an average of 90.6bps. ENRG (the best sector) out-performed IG, moving (on average) 20.8bps (12.65%) tighter to an average of 143.8bps.

From the top-down, index capital structure changes shifted both weaker with credit outperforming equity. The sectors were mixed with CONS (divergent as credit beats equity), ENRG (divergent as credit beats equity), FINL (equity beating credit as they both deteriorate), INDU (divergent as credit beats equity), and TMT (both weaker with credit outperforming equity).

CDX-based regression betas indicate that TMT (1.06x) have the highest beta and ENRG (0.9x) the lowest, with INDU (1.03x), CONS (0.97x), and FINL (0.92x) in between. Comparing the regression betas to current level betas we see that CONS (0.23x rich) is the richest sector, while FINL (-0.59x cheap) is the cheapest, with INDU (0.14x rich), TMT (0.14x rich), and ENRG (-0.27x cheap) trading more in line.

Focusing on intra-sector movements within IG, we notice dispersion increasing the most in TMT which shifted 0.52% to 49.2bps, and the least in ENRG which shifted -22.61% to 111.8bps.

Single-Name Movers (Friday-to-Friday)
The biggest absolute movers in IG were Allstate Corp (+14.59bps), SLM Corp (+11.51bps), and Barrick Gold Corp. (+7.5bps) in the underperformers, and Transocean Ltd. (-122.5bps), Anadarko Petroleum Corp. (-106.66bps), and FirstEnergy Corp (-22.5bps) in the outperformers. The biggest percentage movers in IG were Allstate Corp (+15.36%), Barrick Gold Corp. (+11.03%), and Capital One Bank (+7.69%) in the underperformers, and Transocean Ltd. (-24.5%), Anadarko Petroleum Corp. (-20.49%), and Devon Energy Corporation (-14.45%) in the outperformers.

In Main, the biggest percentage movers were Anglo American Plc (+33.2%), Akzo Nobel NV (+14.93%), and Banca Monte dei Paschi di Siena SpA (+13.51%) in the underperformers, and Banco Espirito Santo SA (-9.92%), Enel SpA (-6.34%), and Volkswagen AG (-5.8%) in the outperformers.The largest absolute movers in Main were Anglo American Plc (+52.46bps), Banca Monte dei Paschi di Siena SpA (+18.92bps), and Holcim Ltd (+14.44bps) in the underperformers, and Banco Espirito Santo SA (-44.65bps), BP PLC (-21bps), and Glencore International AG (-15.05bps) in the outperformers.

The biggest percentage movers in XOver were Alcatel-Lucent (+6.2%), Wendel SA (+4.97%), and Sol Melia SA (+3.88%) in the underperformers, and NXP b.v. (-13.06%), Deutsche Lufthansa AG (-6.7%), and Ineos Group Holdings plc (-6.12%) in the outperformers.The largest absolute movers in XOver were Seat Pagine Gialle SpA (+55.98bps), Alcatel-Lucent (+45.31bps), and Sol Melia SA (+27.74bps) in the underperformers, and NXP b.v. (-149.54bps), BCM Ireland Finance Ltd (-101.47bps), and Ineos Group Holdings plc (-76.39bps) in the outperformers.

In the names of the HY index, the biggest percentage movers were Energy Future Holdings Corp. (+12.7%), Louisiana-Pacific Corp (+8.33%), and RadioShack Corp (+6.41%) in the underperformers, and Domtar Corporation (-22.22%), Pride International Inc. (-15.07%), and CSC Holdings, Inc. (-9.75%) in the outperformers. The largest absolute movers in HY were Energy Future Holdings Corp. (+271.89bps), Dynegy Holdings Inc. (+41.87bps), and iStar Financial Inc. (+41.39bps) in the underperformers, and Freescale Semiconductor, Inc. (-100.99bps), McClatchy Co./The (-74.86bps), and Boyd Gaming Corporation (-64.56bps) in the outperformers.

The CDR Counterparty Risk Index Series 2 (of brokers and banks) rose 0.44bps (or 0.32%) to 140.14bps. Barclays Bank Plc (11.73bps) is the worst (absolute) performer among the banks/brokers of the CDR Counterparty Index, whilst Barclays Bank Plc (9.38%) is the worst (relative) performer. Dresdner Bank AG (-16.04bps) is the best (absolute) performer among the banks/brokers of the CDR Counterparty Index, and Dresdner Bank AG (-13.21%) is the best (relative) performer.

The CDR Aussie Index rose 0.64bps (or 0.58%) to 111.34bps. QBE Insurance Group Limited (8.66bps) is the worst (absolute) performer, whilst QBE Insurance Group Limited (4.62%) is the worst (relative) performer. Woodside Petroleum Limited (-6.82bps) is the best (absolute) performer, and Wesfarmers Limited (-6.19%) is the best (relative) performer.

The CDR Asian Index fell -2.11bps (or -1.8%) to 115.2bps. Genting Berhad (3.75bps) is the worst (absolute) performer, whilst Genting Berhad (3.71%) is the worst (relative) performer. Acom Co Ltd (-37.96bps) is the best (absolute) performer, and Acom Co Ltd (-9.74%) is the best (relative) performer.

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