Comments & Movers

4/29/2010

Daily Credit Update 4/29/2010 | Turnaround and Stop

By Tim Backshall, Chief Strategist

Spreads rallied today as bailout chatter in Europe and Exhibit 1. UK CDS-Cash Neg Basis following the same
marginally improving macro data in the US supported path as Greece, Portugal, and Spain…
some risk appetite. IG credit traded down to Monday's
tights but was unable to break down, pulling off the
tights into the close, though notably its widest levels of
the day were well below yesterday's tightest levels.

HY and equities remain weaker than Monday and Friday's

close (unlike IG) which suggests that while the last two days
have seen some recovery from the early week dips, the
recovery is more quality focused and bonds not equities - a
theme that we have seen again and again during this run.

TSYs also saw strength today as money flowed into US

assets (risky or riskless). LCDX slightly underperformed HY
today and while in absolute terms HY outperformed IG,
empirically they were about unch adjusted for beta. With the
rally in Europe underway, US opened gap tighter and by the
close ITRX ExFINLs were 7bps tighter at 81bps compared to
IG exFINLs 2.5bps tighter at 86bps - reverting to a more
normal differential for now.
Sovereign risk had a good day as it appears that everyone
always is too big to fail and bailouts are free with a Venti
cappuccino or bottle of Grappa. The self-serving IMF
members appear to be able to conjure EUR100bn's and it
appears the voluntary restructuring that we have been
discussing is on its way. CDS compressed another 72bps
today (now at 630bps in 5Y) but remain handily rich to
GGBs. As we have said so many times before, a bailout is
not a solution and merely removes the immediate threat of
absolute default. EUR100bn will see Greece through the
next three years of interest and principal payments only - but
how will they fund their deficits? What cost? We note the 5%
IMF/EU chatter is now less than what Portugal will pay to refi
- surely they'll want some of that too?
It is clear from the pattern of bond underperformance vs
CDS in Greece, Portugal, Spain, and now the UK that real
money is leaving European bond markets and today's rally in
TSYs and modest duration extension (flattening) in the face
of a decent risk rally (and gold rallying) suggests that even
though there was some EUR strength DXY weakness, flows
are moving back home. On the UK, note that we saw
considerable derisking in DTCC data last week on little
decompression in spreads unch - which suggests dealers
unwinding Gilts (given Gilts underperformance of CDS) - not
a good sign.
© Copyright 2010 Credit Derivatives Research LLC. All Rights Reserved.
Breadth was entirely positive today with high beta
outperforming low beta and FINLs trumping non-FINLs. As
has been the case recently, a compression day sees the
indices outperforming intrinsics in almost every case - IG,
Main (which crossed back over today), XOver, HY 3Y (not so
much HY5Y), SovX, and ITRX FINLs. In general curves
steepened in the indices but in single names we note 3s5s
flatteners were almost double steepeners while 5s10s were
mixed - so more of the same theme there of risk being
shuffled closer (even on a good day).
TMT were the best performers today in 5Y with CONSumer
and INDUstrial credits close behind. ENRG was weak with
RIG unfortunately dragging the sector down along with HAL.
It seems the increasingly likely "bailout without strings" for
Greece or whoever wants it is a signal to cover shorts on EU
banks and we saw notable compression today. US banks
caught that positive contagion and were helped by what
appears is some watering down of FINREG (but who
knows). US banks face one unsurmountable obstacle and
that is the refinancing of a wall of TLGP debt. Aside from
event risk fears, the EU banks went into this crisis in a worse
place than the US banks and the recent sell-off in Europe
has brought risk more into line with the US in general.
In our broader universe, RIG, HAL, NE, YRCW, RRI, and
APC were the biggest underperformers based on spread vol
(with YRCW standing out in absolute terms). IPG, PDE, BC
(great call Byron!), RCL, AMKR, DPL, CBS, and GT were
the best spread vol based performers in CDS land today.

It was hard to argue that anything technical was driving us
today and it seemed like a lack of sovereign catalysts and
some relatively positive macro data were enough for traders
to follow the path of least resistance tighter. I do not think we
cross back across the channel of glee in IG this time though
as between systemic event risk in Europe and idiosyncratic
releveraging fears IG has found a new floor - HY of course is
a beast of its own and will wonder far and wide at the beck
and call of its savings-flow-driven master (until it doesn't). IG
did manage to close at its 50-day average today after
spending a glorious 3 days above it and if a stop is required,
87bps and below that 81bps are decent pivot points with
93bps and 98.75bps as upside target/breakout levels for
swingers.
Capital Structure Changes
The great majority of single-names were in agreement today
with both equity and credit outperrforming. These included
BC 5Y -75bps (-1.51SDs) and Stock +7.96SDs (27.33%),
RCL 5Y -20bps (-1.44SDs) and Stock +3SDs (8.08%), JCI
5Y -7bps (-1.28SDs) and Stock +2.19SDs (4.23%), GR 5Y -
4bps (-1.14SDs) and Stock +1.79SDs (2.94%), MAR 5Y -
6bps (-1.1SDs) and Stock +2.67SDs (4.96%), GT 5Y -26bps
(-1.07SDs) and Stock +1.29SDs (3.55%), IP 5Y -7bps (-
1.04SDs) and Stock +1.26SDs (3.02%), DHR 5Y -4bps (-
1.04SDs) and Stock +1.35SDs (1.8%), WY 5Y -11bps (-
1.03SDs) and Stock +1.46SDs (2.88%), VIA 5Y -6bps (-
1.03SDs) and Stock +1.11SDs (1.74%), BWA 5Y -6bps (-
0.98SDs) and Stock +6.01SDs (10.31%), and CMCSA US
5Y -4bps (-0.56SDs) and Stock +3.87SDs (6.33%).
The smallest cohort today were the those agreeing to
deteriorate with both equity and credit deteriorating in SO 5Y
+1bps (+0.26SDs) and Stock -1.87SDs (-1.76%), APA 5Y
+1bps (+0.29SDs) and Stock -1.8SDs (-3.43%), EK 5Y
+21bps (+0.46SDs) and Stock -3.92SDs (-16.89%), APC 5Y
+3bps (+0.64SDs) and Stock -1.76SDs (-4.09%), YRCW 5Y
+129bps (+1.29SDs) and Stock -1.12SDs (-9.9%), NE 5Y
+6bps (+1.36SDs) and Stock -1.28SDs (-2.77%), HAL 5Y
+8bps (+2.17SDs) and Stock -2.19SDs (-5.25%), and RIG
5Y +15bps (+2.77SDs) and Stock -2.99SDs (-7.45%).
The names that showed divergence today were dominated
by credit outperformers such as CAH 5Y -3bps (-0.7SDs)
and Stock -1.25SDs (-1.76%), SWY 5Y -3bps (-0.67SDs)
and Stock -3.73SDs (-5.98%), CAM 5Y -4bps (-0.62SDs)
and Stock -4.38SDs (-12.98%), RYL 5Y -3bps (-0.27SDs)
and Stock -1.46SDs (-3.96%), OKS 5Y -2bps (-0.23SDs)
and Stock -1.97SDs (-1.97%), KR 5Y -1bps (-0.22SDs) and
Stock -1.62SDs (-2.56%), and PG 5Y -1bps (-0.13SDs) and
Stock -1.52SDs (-1.54%). While the few names that showed
© Copyright 2010 Credit Derivatives Research LLC. All Rights Reserved.
Comments & Movers
4/29/2010
equity strength but credit weakness include UIS 5Y 0bps
(0SDs) and Stock +2.65SDs (7.25%), FDX 5Y +1bps
(+0.08SDs) and Stock +1.03SDs (1.92%), ETN 5Y +1bps
(+0.11SDs) and Stock +1.51SDs (2.46%), HOV 5Y +12bps
(+0.18SDs) and Stock +1.95SDs (9.48%), and K 5Y +1bps
(+0.28SDs) and Stock +4.85SDs (4.62%).
Movers in Detail
Spreads were tighter in the US as all the indices improved.
IG trades 0.3bps tight (rich) to its 50d moving average, which
is a Z-Score of -0.1s.d.. At 89.25bps, IG has closed tighter
on 46 days in the last 343 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's
skew widened as it underperformed.
18.4% of names in IG moved more than their historical vol
would imply as higher vol names outperformed lower vol
names by -2.76% to -2.72%. IG's vol is around 4.38% per 1
day period, which leaves 111 names higher vol and 14 lower
vol than the index.
The names having the largest impact on IG are American
International Group, Inc. (-17bps) pushing IG 0.13bps
tighter, and Transocean Ltd. (+14bps) adding 0.11bps to IG.
HVOL is more sensitive with American International Group,
Inc. pushing it 0.54bps tighter, and Ryder System Inc.
contributing 0bps to HVOL's change today. The less volatile
ExHVOL's move today is driven by both Arrow Electronics
Inc. (-7bps) pushing the index 0.07bps tighter, and
Transocean Ltd. (+14bps) adding 0.15bps to ExHVOL.
The price of investment grade credit rose 0.21% to around
100.48% of par, while the price of high yield credits rose
0.46% to around 100.59% of par. ABX market prices are
higher (improving) by 0.08% of par or in absolute terms,
0.21%. Volatility (VIX) is down -2.64pts to 18.7%, with 10Y
TSY rallying (yield falling) 3.7bps to 3.73% and the 2s10s
curve flattened by 0.5bps, as the cost of protection on US
Treasuries fell 3bps to 37bps. 2Y swap spreads widened
1.4bps to 17.94bps, as the TED Spread tightened by 0.2bps
to 0.18% and Libor-OIS deteriorated 0.4bps to 11.6bps.
The Dollar weakened with DXY falling 0.38% to 82.066, Oil
rising $2.15 to $85.37 (outperforming the dollar as the value
of Oil (rebased to the value of gold) rose by 2.45% today (a
2.2% rise in the relative (dollar adjusted) value of a barrel of
 Comments & Movers
4/29/2010

oil), and Gold increasing $1.5 to $1167.2 as the S&P rallies
(1205.2 1.27%) outperforming IG credits (89.25bps 0.21%)
while IG, which opened tighter at 92bps, underperforms HY
credits. IG13 and XOver13 are -4.87bps and -26.5bps
respectively while ITRX13 is -8.75bps to 89.25bps.
IG CDS market (as per CDX) is 22.7bps cheap (we'd expect
LQD to underperform TLH) to the LQD-TLH-implied
valuation of investment grade credit (66.53bps), with the
bond ETFs underperforming the IG CDS market by around
5.95bps.

Dispersion fell -1.8bps in IG. Broad market dispersion is less
than historically expected given current spread levels,
pointing to a more sanguine view of credits as investors
discriminate less between names, with dispersion increasing
more than expected today indicating a less systemic and
more idiosyncratic spread widening/tightening at the tails.
46% of IG credits are shifting by more than 3bps and 58% of
the CDX universe are also shifting significantly (more than
the 5 day average of 47%). The number of names wider than
the index increased by 4 to 52 as the day's range fell to
3.75bps (one-week average 3.9bps), between low bid at
88.5 and high offer at 92.25 and higher beta credits (-3.21%)
outperformed lower beta credits (-2.39%).
In IG, tighteners outpaced wideners by around 27-to-1, with
4 credits wider. By sector, CONS saw 0% names wider,
ENRGs 24% names wider, FINLs 0% names wider, INDUs
0% names wider, and TMTs 0% names wider. Focusing on
non-financials, Europe (ITRX Main exFINLS) outperformed
US (IG exFINLs) with the former trading at 81.81bps and the
latter at 85.68bps.
In Europe, ITRX Main ex-FINLs (underperforming FINLs)
rallied 7.07bps to 81.81bps (with ITRX FINLs -trending
wider- better by 15.5 to 119bps) and is currently trading tight
to its week's range at 16.53%, between 88.88 to 80.41bps,
and is trending wider. Main LoVOL (sideways trading) is
currently trading tight to its week's range at 8.16%, between
85.68 to 75.04bps. ExHVOL underperformed LoVOL as the
differential decompressed to -4.89bps from -10.16bps, but
remains below the short-term average of -3.35bps. The Main
exFINLS to IG ExHVOL differential compressed to 10.8bps
from 13.35bps, but remains above the short-term average of
7.87bps.
The Emerging Market index is 2% less risky (4.5bps tighter)
to 221.8bps. EM (Trend Wider) is currently trading in the
middle of the week's range at 72.42%, between 226.3 to
209.9bps. The HY-EM spread compressed to 263.31bps
from 270.46bps, but remains below the short-term average
of 270.72bps, with the HY/EM ratio falling to 2.19x, below its
5-day mean of 2.25x.

Cross Market, we are seeing the HY-XOver spread

decompressing to 55.59bps from 40.72bps, and remains
above the short-term average of 53.56bps, with the
HY/XOver ratio rising to 1.13x, above its 5-day mean of
1.12x. The IG-Main spread decompressed to 0bps from -
4bps, but remains below the short-term average of 0.98bps,
with the IG/Main ratio rising to 1x, below its 5-day mean of
1.01x. 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 underperformed financials as IG

ExFINLs are tighter by 2.5bps to 85.7bps, with 92 of the 106
names tighter. while among US Financials, the CDR
Counterparty Risk Index fell 11.22bps to 121.05bps, with
Finance names (worst) tighter by 18.22bps to 280.83bps,
Brokers (best) tighter by 18.08bps to 150.17bps, and Banks
tighter by 9.71bps to 103.58bps. Monolines are trading
tighter on average by -73.11bps (3.57%) to 2130.19bps.

In IG, FINLs outperformed non-FINLs (3.28% tighter to

2.82% tighter respectively), with the former (IG FINLs) tighter
by 4.3bps to 126.3bps, with 17 of the 19 names tighter. The
© Copyright 2010 Credit Derivatives Research LLC. All Rights Reserved.
 Comments & Movers
4/29/2010

Index/Intrinsics Changes
CDR LQD 50 NAIG -4.22bps to 81.64 (0 wider - 45 tighter
<> 21 steeper - 27 flatter).
CDX14 IG -4.5bps to 89.5 ($0.2 to $100.47) (FV -2.74bps
to 91.8) (5 wider - 112 tighter <> 67 steeper - 53 flatter) -
No Trend.
CDX14 HVOL -5.5bps to 147 (FV -5.18bps to 0) (1 wider -
28 tighter <> 19 steeper - 11 flatter) - Trend Wider.
Single-Name Movers
Today's biggest absolute movers in IG were Transocean Ltd.
(+14bps), Halliburton Company (+9bps), and Duke Energy
Carolinas, LLC (+6bps) in the wideners, and American
International Group, Inc. (-17bps), SLM Corp (-10.5bps), and
Alcoa Inc. (-10.25bps) in the tighteners. Today's biggest
percentage movers in IG were Transocean Ltd. (+18.06%),
Halliburton Company (+15.65%), and Duke Energy
Carolinas, LLC (+9.6%) in the wideners, and Johnson
Controls Inc (-8.97%), News America Inc (-8.28%), and CBS
Corporation (-7.97%) in the tighteners.

CDX14 ExHVOL -4.18bps to 71.34 (FV -1.99bps to 78.24)
(4 wider - 91 tighter <> 47 steeper - 48 flatter).
CDX14 HY (30% recovery) Px $+0.5 to $100.63 / -12.6bps
to 484.1 (FV -13.5bps to 450.69) (2 wider - 94 tighter <>
65 steeper - 34 flatter) - Trend Wider.
LCDX14 (70% recovery) Px $+0.37 to $99.5 / -9.92bps to
263.07 - Trend Wider.
MCDX14 -5bps to 124bps. - No Trend.
ITRX13 Main --8.75bps to 89.25bps (FV--4.75bps to
91.01bps).
ITRX13 XOver --26.5bps to 429.5bps (FV--16.42bps to
418.75bps).
ITRX13 FINLs --15.5bps to 119bps (FV--10.54bps to
124.67bps).
CDR Counterparty Risk Index fell 11bps (-8.31%) to
121.27bps (1 wider - 13 tighter).
In Main, the biggest percentage movers were Suedzucker
AG (+1.21%), France Telecom (+0.97%), and Bouygues
(0%) in the wideners, and Enel SpA (-14.04%), Credit
Agricole SA (-12.94%), and Banco Bilbao Vizcaya Argentaria
SA (-12.56%) in the tighteners.The largest absolute movers
in Main were Suedzucker AG (+1.25bps), France Telecom
(+0.5bps), and Bouygues (0bps) in the wideners, and Banco
Espirito Santo SA (-31.67bps), Banco Bilbao Vizcaya
Argentaria SA (-24.5bps), and EDP-Energias de Portugal,
S.A. (-22.5bps) in the tighteners.
The biggest percentage movers in XOver were Nordic
Telephone Company Holding ApS (+3.96%), Infineon
Technologies AG (+2.16%), and BCM Ireland Finance Ltd
(+0.82%) in the wideners, and Grohe Holding GmbH (-
13.09%), UPM-Kymmene Oyj (-9.4%), and Stora Enso Oyj (-
8.33%) in the tighteners.The largest absolute movers in
XOver were BCM Ireland Finance Ltd (+10.2bps), Nordic
Telephone Company Holding ApS (+7.33bps), and Infineon
Technologies AG (+3.92bps) in the wideners, and Grohe
Holding GmbH (-115.46bps), Seat Pagine Gialle SpA (-
105.19bps), and Norske Skogindustrier ASA (-90.89bps) in
the tighteners.

CDR Government Risk Index fell 5.14bps (-5.59%) to In the names of the HY index, today's biggest percentage
86.79bps.. movers were RRI Energy, Inc. (+1.41%), Eastman Kodak
Co. (+1.31%), and Constellation Brands, Inc. (0%) in the
DXY weakened 0.42% to 82.04. wideners, and Brunswick Corp. (-19.05%), Amkor
Technology Inc. (-12.17%), and iStar Financial Inc. (-8.96%)
Oil rose $2.26 to $85.48. in the tighteners. The largest absolute movers in HY were
RRI Energy, Inc. (+9.9bps), Eastman Kodak Co. (+9.2bps),
Gold rose $1.3 to $1167. and Constellation Brands, Inc. (0bps) in the wideners, and
iStar Financial Inc. (-90.03bps), Brunswick Corp. (-80bps),
VIX fell 2.64pts to 18.44%. and Amkor Technology Inc. (-65.15bps) in the tighteners.

10Y US Treasury yields fell 3.9bps to 3.73%. The CDR Counterparty Risk Index Series 2 (of brokers and
banks) fell -11bps (or -8.31%) to 121.27bps. Dresdner Bank
S&P500 Futures gained 1.24% to 1204.8 AG (6.14bps) is the worst (absolute) performer among the
banks/brokers of the CDR Counterparty Index, whilst
© Copyright 2010 Credit Derivatives Research LLC. All Rights Reserved.
 Comments & Movers
4/29/2010

Dresdner Bank AG (6.53%) is the worst (relative) performer.

Goldman Sachs Group Inc (-22bps) is the best (absolute)
performer among the banks/brokers of the CDR
Counterparty Index, and Goldman Sachs Group Inc (-
14.33%) is the best (relative) performer.

The CDR Aussie Index fell -3.83bps (or -4.87%) to 74.71bps.

CSR Limited (-0.53bps) is the worst (absolute) performer,
whilst CSR Limited (-0.8%) is the worst (relative) performer.
Macquarie Bank Limited (-8.16bps) is the best (absolute)
performer, and Foster's Group Limited (-7.94%) is the best
(relative) performer.

The CDR Asian Index fell -0.9bps (or -0.97%) to 91.39bps.

SK Telecom Co Ltd (7.34bps) is the worst (absolute)
performer, whilst SK Telecom Co Ltd (11.89%) is the worst
(relative) performer. Reliance Industries Ltd. (-7.78bps) is
the best (absolute) performer, and Hutchison Whampoa Ltd
(-8.14%) is the best (relative) performer.

© Copyright 2010 Credit Derivatives Research LLC. All Rights Reserved.