Credit underperformed equities this week as single-name tighteners edged wideners by four-to-three leaving indices (especially HY) underperforming intrinsics in general. CONSumer and ENRG names underperformed as TMT and FINLs were best with INDUstrials mixed. Financials outperformed non-financials but the strength in the former was more at the tails of the distribution while the weakness in the latter was more broad-based.
The go-go stock names such as AIG were among the best performers in IG with AIG and CIT near the top along with TXT, HIG, and ILFC). On the other end some sense of reality hit as the higher beta retailers widened with M, JCP, JWN, KSS, and KR the worst performers. Thank to the tail names, high beta credits managed to outperform on the week but the distribution is very wide as low beta names were on average wider by over 1%. ExHVOL was the worst performing index with a 4.5bps shift wider to over 70bps. HY skew widened notably on the week as we sense a lack of liquidity in single-names (and some protection selling on the overly hiked names such as FST and CHK) combined with flows into HY-IG decompression pulled HY away (rightly in our opinion).
IG12's index curve steepened as it widened while 5s7s intrinsics actually flattened/inverted further. HVOL index and intrinsics tracked each other closely this week, both falling (and outperforming) as we sense the 'closeness' of the higher beta retailers to the spread level of HVOL provides some clear evidence of why HVOL rallied (carry cover on the shorts).
IG saw on-the-runs underperforming off-the-runs with IG6-9 all significantly tighter as it appears the whole curve steepened up helped by the tail compression in AIG as much as anything else (where close maturities gapped tighter dramatically). HY was more mixed but tended to agree with IG11-12 underperforming HY6-9.
Over the week ABX and CMBX prices were higher on average by a smidge with CMBX outperforming as we note REITs tighter on the week but builders more mixed as low spread names underperformed wider names by quite a chunk.
Financials were mostly tighter on the week but not by much with SLM and ABK the exceptions and we note that MS and GS underperformed the rest of the majors. Insurers were more mixed.
The week's range was very low for both IG and HY (the lowest since the same week last year) but indices traded more regularly than gappy providing some reality for market watchers. HY-XOver decompressed over 30bps as we noted that LCDX-HY compressed 5bps on the week despite the last few days widening. HY-IG over XOver-Main continues to trend our way (+28bps this week) as we see XOver actually tighter on the week (but closed as equities were high this morning). Notably, given some of the technicals, we like looking at the HY-IG differential relative to stocks as a guide for relative performance and while the S&P managed a small gain, credit deteriorated notably even as TSY yields fell over 11bps (in 10Y) which tends to indicate the reach-for-yield corporate bond demand from a deflationary low-rate outlook which has been a driver is perhaps running out of steam.
Across all the asset classes, HY was one of the weakest while everything pretty much stuck there, gold up a smidge, oil down a buck, the dollar up a little, and VIX down a tad. The only other thing that had a decent nove was equity implied correlation which rose almost 3pts (which in the face of VIX contraction and equity flatness in notable). We said it in the dailies but the HY-IG and implied correlation moves provide us with some anxiety that sophisticated players are starting to try to position (subtly) for a break (down).
As a teaser for Monday's month end update, some stats from 7/31: SPX is +4.3%, VIX is -1.2pts, Dollar is a smidge weaker, Oil and Gold are up, and TSY yields are modestly lower...BUT...IG is over 5bps wider, HY is 56bps wider, ExHVOL is 13bps wider, wideners outpaced tighteners by almost five-to-one, CONS and TMT have significantly underperformed, the crazy distressed names (AIG/ILFC/CIT/TXT) provided dramatic help for IG and HVOL, the top 5 performers in IG provided around 8bps of tightening in the index while the bottom 40 performers widened IG by 8bps - if that tail hadn't compressed (helped by the squeeze in stocks) we would be significantly wider. Financial spreads have significantly (GS for example) underperformed Financial stocks as senior-subs have decompressed on the month.
Commentary compliments of www.creditresearch.com
Index/Intrinsics Changes
CDR LQD 50 NAIG -1.16bps to 98.1 (23 wider - 25 tighter <> 22 steeper - 27 flatter).
CDX12 IG +1bps to 116 ($-0.02 to $99.34) (FV -1.73bps to 125.88) (61 wider - 58 tighter <> 68 steeper - 56 flatter) - No Trend.
CDX12 HVOL -9.38bps to 260 (FV -9.19bps to 314.5) (7 wider - 20 tighter <> 23 steeper - 7 flatter) - No Trend.
CDX12 ExHVOL +4.28bps to 70.53 (FV +0.46bps to 72.56) (54 wider - 41 tighter <> 50 steeper - 45 flatter).
CDX11 XO +2.3bps to 306.8 (FV +1.79bps to 350.3) (18 wider - 14 tighter <> 16 steeper - 18 flatter) - Trend Wider.
CDX12 HY (30% recovery) Px $-0.75 to $88.38 / +23.5bps to 828.5 (FV -19.89bps to 738.14) (26 wider - 63 tighter <> 49 steeper - 43 flatter) - Trend Wider.
LCDX12 (65% recovery) Px $-0.73 to $93.35 / +28.13bps to 726.94 - Trend Wider.
MCDX12 -17bps to 123bps. - Trend Tighter.
CDR Counterparty Risk Index fell 6.41bps (-5.21%) to 116.5bps (1 wider - 13 tighter).
CDR Government Risk Index fell 2.57bps (-5.63%) to 43.04bps..
DXY strengthened 0.32% to 78.3.
Oil fell $1.13 to $72.76.
Gold rose $1.85 to $955.7.
VIX fell 0.25pts to 24.76%.
10Y US Treasury yields fell 12bps to 3.45%.
S&P500 Futures gained 0.21% to 1027.4.
Market Summary
Spreads were mixed in the US with IG worse, HVOL improving, ExHVOL weaker, XO wider, and HY selling off. Indices typically underperformed single-names with skews mostly narrower as IG underperformed but narrowed the skew, HVOL outperformed but widened the skew, ExHVOL intrinsics beat and narrowed the skew, XO underperformed but compressed the skew, and HY's skew widened as it underperformed.
Only 8.8% of names in IG moved more than their historical vol would imply as higher vol names outperformed lower vol names by -0.56% to 1.93%. IG's vol is around 9.79% per one-week period, which leaves 98 names higher vol and 27 lower vol than the index.
The names having the largest impact on IG are American International Group, Inc. (-153.26bps) pushing IG 0.96bps tighter, and Macy's, Inc. (+21.52bps) adding 0.16bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 4.23bps tighter, and Macy's, Inc. contributing 0.7bps to HVOL's change today.
