Spreads ended this tempestuous week mixed with breadth generally weak (wideners outpacing tighteners by over two-to-one) and curves flattening more than steepening in single-names. HY outperformed IG as both IG and HY managed gains on the week (Friday-to-Friday close) and even more so from Monday's gap wider openings as the intraday ranges increased as the week progressed.
IG and HY closed today within a few bps of their opening (low/tight) levels of last Thursday as HY reached back above $89 by the end of the week. Interestingly, given the headlines, we saw CMBS prices drop and ABX (RMBS) prices rise on the week as CRE losses are on the tip of everyone's tongues as is a residential housing bottom (not!).
IG and HY intrinsics both underperformed as the indices saw tecahnicals at play as well as equities weighing positively and negatively on them every day. HVOL was a smidge wider as was XO while ExHVOL tightened over 4bps (as its intrinsics widened 1bps). The compression in HY skews (and HVOL index underperformance) suggest active index arb and indeed we heard/saw a number of full and partial lists circulating. The flow from HY-IG decompression coupled with this HY compression pressure may have been a driver of some of the gap-like trading we saw this week.
In Europe, XOver was practically unch while Main was a tad tighter with senior-sub decompressing very mildly and XOver underperforming HY. Financials were the winners on the week as the high beta insurers rallied and banks/brokers followed (though not as aggressively). GS underperformed its peers quite considerably (great for our trade vs USA) but the less than bad news from credit card delinquency data helped AXP and COF outperform on the week.
All non-financial sectors were wider with TMT underperforming (as the lowest beta names gave up some considerable ground this week). AT&T(T) Mobility shifted from 19bps to 24bps as VIA, TWX, and RRD were notably weaker. ENRG, helped or hindered by a more than $6 rise in oil prices, saw weakness as SRE and AEP underperformed as E&P names performed better, INDUs were the best of the non-financials as builders managed gains while CONSumer credits saw around half the names wider by more than 2%.
HY-IG compressed 32bps as HY clung to 800bps and LCDX fell just below 700bps by week's end. The dollar lost over 1% of its value as stocks rose around 2% with 10Y TSYs practically unch (with a slight flattening of the curve). VIX was a little higher as oil and gold both rose on the week. An odd week all-in-all.
The over/under on B.F.F. (Bank Failure Friday) is 4 - have a great weekend.
Commentary compliments of www.creditresearch.com
Index/Intrinsics Changes
CDR LQD 50 NAIG -0.34bps to 98.91 (21 wider - 25 tighter <> 31 steeper - 19 flatter).
CDX12 IG -2.78bps to 114 ($0.13 to $99.42) (FV -0.53bps to 126.95) (67 wider - 50 tighter <> 72 steeper - 53 flatter) - Trend Tighter.
CDX12 HVOL +2.42bps to 270 (FV -6.37bps to 322.45) (13 wider - 15 tighter <> 19 steeper - 11 flatter) - Trend Tighter.
CDX12 ExHVOL -4.42bps to 64.74 (FV +1.18bps to 72) (54 wider - 41 tighter <> 42 steeper - 53 flatter).
CDX11 XO +21.9bps to 309.9 (FV +15.03bps to 349.74) (21 wider - 11 tighter <> 17 steeper - 16 flatter) - No Trend.
CDX12 HY (30% recovery) Px $+1 to $89.13 / -31.6bps to 806.3 (FV +20.06bps to 770.37) (75 wider - 19 tighter <> 22 steeper - 73 flatter) - Trend Tighter.
LCDX12 (65% recovery) Px $+0.81 to $94.1 / -31.38bps to 698.8 - Trend Tighter.
MCDX12 -2.67bps to 141bps. - No Trend.
CDR Counterparty Risk Index fell 0.56bps (-0.45%) to 122.54bps (8 wider - 6 tighter).
CDR Government Risk Index rose 0.05bps (0.11%) to 45.5bps..
DXY weakened 1.03% to 78.07.
Oil rose $6.48 to $73.99.
Gold rose $5.65 to $954.2.
VIX increased 0.74pts to 25.01%.
10Y US Treasury yields fell 0.4bps to 3.57%.
S&P500 Futures gained 1.93% to 1025.2.
Market Summary
Spreads were mixed in the US with IG tighter, HVOL wider, ExHVOL better, XO wider, and HY rallying. Indices generally outperformed intrinsics with skews mostly narrower as IG's skew decompressed as the index beat intrinsics, HVOL underperformed but narrowed the skew, ExHVOL outperformed pushing the skew wider, XO underperformed but compressed the skew, and HY outperformed but narrowed the skew.
Only 13.6% of names in IG moved more than their historical vol would imply as higher vol names outperformed lower vol names by -0.32% to 3.57%. IG's vol is around 9.79% per one-week period, which leaves 63 names higher vol and 62 lower vol than the index.
The names having the largest impact on IG are American International Group, Inc. (-131.32bps) pushing IG 0.79bps tighter, and RR Donnelley & Sons Company (+34.58bps) adding 0.26bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 3.47bps tighter, and RR Donnelley & Sons Company contributing 1.13bps to HVOL's change this week. The less volatile ExHVOL's move this week is driven by both Capital One Bank (-20bps) pushing the index 0.21bps tighter, and Viacom Inc. (+16.88bps) adding 0.17bps to ExHVOL.
The price of investment grade credit rose 0.13% to around 99.42% of par, while the price of high yield credits rose 1% to around 89.13% of par. ABX market prices are higher (improving) by 0.01% of par or in absolute terms, 0.23%. Broadly speaking, CMBX market prices are lower by 0.87% of par or in absolute terms, 0.31%. Volatility (VIX) is up 0.74pts to 25.01%, with 10Y TSY rallying (yield falling) 0.4bps to 3.57% and the 2s10s curve flattened by 4.5bps, as the cost of protection on US Treasuries fell 2.38bps to 24bps. 2Y swap spreads widened 3.5bps to 43.5bps, as the TED Spread tightened by 2.6bps to 0.24% and Libor-OIS improved 4.7bps to 20.1bps.
