The Week in Credit: Weekly Credit Market Summary

Spreads were tighter in the US this week as all the indices improved. Indices typically underperformed single-names with skews mostly narrower (as curves steepened and high beta outperformed low beta) as IG underperformed but narrowed the skew, HVOL underperformed but narrowed the skew, ExHVOL intrinsics beat and narrowed the skew, XO underperformed but compressed the skew, and HY outperformed but narrowed the skew.

The names having the largest impact on IG are American International Group, Inc. (AIG) (-272.37bps) pushing IG 1.24bps tighter, and Pfizer Inc. (PFE) (+3.5bps) adding 0.03bps to IG. HVOL is more sensitive with American International Group, Inc. pushing it 5.5bps tighter, and Caterpillar Inc. contributing -0.07bps to HVOL's change today. The less volatile ExHVOL's move today is driven by both National Rural Utilities Cooperative Finance Corporation (NRC)(-65.63bps) pushing the index 0.66bps tighter, and Pfizer Inc. (+3.5bps) adding 0.04bps to ExHVOL.

The price of investment grade credit rose 0.41% to around 98.39% of par, while the price of high yield credits rose 2.005% to around 81.63% of par. ABX market prices are lower by 0.61% of par or in absolute terms, 1.75%. Broadly speaking, CMBX market prices are lower by 1.72% of par or in absolute terms, 0.54%. Volatility (VIX) is down 3.71pts to 28.92%, with 10Y TSY selling off (yield rising) 1bps to 3.46% and the 2s10s curve flattened by 2.1bps, as the cost of protection on US Treasuries rose 5.49bps to 48bps. 2Y swap spreads widened 0.1bps to 40.75bps, as the TED Spread widened by 4bps to 0.53% and Libor-OIS deteriorated 0.2bps to 45.5bps.

The Dollar weakened with DXY falling 0.88% to 79.257, Oil rising $4.82 to $66.49 (outperforming the dollar as the value of Oil (rebased to the value of gold) rose by 5.43% today (a 6.94% rise in the relative (dollar adjusted) value of a barrel of oil), and Gold increasing $21.7 to $979.05 as the S&P rallies (918.1 3.75%) outperforming IG credits (137.63bps 0.42%) while IG, which opened the week wider at 150bps, underperforms HY credits. IG11 and XOver11 are -9.83bps and -27.66bps respectively while ITRX11 is -3.66bps to 120.5bps.

The majority of credit curves steepened as the vol term structure steepened with VIX/VIXV decreasing implying a more bearish/more volatile short-term outlook (normally indicative of short-term spread decompression expectations).

Dispersion fell 25.7bps in IG. Broad market dispersion is a little greater than historically expected given current spread levels, indicating more general discrimination among credits than on average over the past year, and dispersion decreasing more than expected this week indicating a less systemic and more idiosyncratic narrowing of the distribution of spreads.

73% of IG credits are shifting by more than 3bps and 57% of the CDX universe are also shifting significantly (more than the 5 day average of 47%). The number of names wider than the index stayed at 41 as the week's range fell to 14bps (one-month average 23.5bps), between low bid at 137 and high offer at 151bps and higher beta credits (-8.46%) outperformed lower beta credits (-6.48%).

In IG, wideners were outpaced by tighteners by around 5-to-1, with only 7 credits notably wider. By sector, CONS saw 5% names wider, ENRGs 6% names wider, FINLs 5% names wider, INDUs 0% names wider, and TMTs 13% names wider. Focusing on non-financials, Europe (ITRX Main exFINLS) underperformed US (IG12 exFINLs) with the former trading at 120.88bps and the latter at 111.92bps.

Cross Market, we are seeing the HY-XOver spread compressing to 332.43bps from 379.64bps, and remains below the short-term average of 367.56bps, with the HY/XOver ratio falling to 1.46x, below its 5-day mean of 1.49x. The IG-Main spread compressed to 17.13bps from 22.86bps, and remains below the short-term average of 21.04bps, with the IG/Main ratio falling to 1.14x, below its 5-day mean of 1.17x.

In the US, non-financials outperformed financials as IG ExFINLs are tighter by 9.1bps to 111.9bps, with 91 of the 104 names tighter. while among US Financials, the CDR Counterparty Risk Index fell 1.64bps to 150.15bps, with Banks (worst) tighter by 4.45bps to 181.65bps, Finance names (best) tighter by 38.23bps to 681.66bps, and Brokers tighter by 7.97bps to 180.83bps. Monolines are trading tighter on average by -40.87bps (1.24%) to 2549.85bps.

In IG, FINLs underperformed non-FINLs (7.83% tighter to 8.53% tighter respectively), with the former (IG FINLs) tighter by 31.6bps to 326.7bps, with 20 of the 21 names tighter. The IG CDS market (as per CDX) is 11.8bps cheap (we'd expect LQD to underperform TLH) to the LQD-TLH-implied valuation of investment grade credit (125.87bps), with the bond ETFs underperforming the IG CDS market by around 1.3bps.

In Europe, ITRX Main ex-FINLs (outperforming FINLs) rallied 4.76bps to 120.88bps (with ITRX FINLs -trading sideways- weaker by 0.77 to 119bps) and is currently trading tight to its week's range at 0%, between 128.81 to 120.88bps, and is trading sideways. Main LoVOL (sideways trading) is currently trading at the wides of the week's range at 77.22%, between 86.93 to 82.5bps. ExHVOL outperformed LoVOL as the differential compressed to -3.04bps from 2.32bps, and remains below the short-term average of 0.73bps. The Main exFINLS to IG ExHVOL differential compressed to 38bps from 38.95bps, and remains below the short-term average of 38.51bps.

Commentary compliments of www.creditresearch.com

Index/Intrinsics Changes

• CDR LQD 50 NAIG091 -12.53bps to 165.86 (2 wider - 43 tighter <> 33 steeper - 16 flatter).
• CDX12 IG -9.38bps to 137.63 ($0.41 to $98.39) (FV -12.7bps to 146.15) (7 wider - 111 tighter <> 92 steeper - 33 flatter) - Trend Tighter.
• CDX12 HVOL -27.03bps to 311 (FV -32.22bps to 365.19) (0 wider - 30 tighter <> 21 steeper - 9 flatter) - Trend Tighter.
• CDX12 ExHVOL -3.81bps to 82.88 (FV -7.04bps to 83.66) (7 wider - 88 tighter <> 24 steeper - 71 flatter).
• CDX11 XO -8.2bps to 318.2 (FV -12.76bps to 411.73) (7 wider - 27 tighter <> 19 steeper - 15 flatter) - Trend Tighter.
• CDX12 HY (30% recovery) Px $+2.01 to $81.63 / -74.9bps to 1056.4 (FV -69.19bps to 978.37) (28 wider - 69 tighter <> 57 steeper - 41 flatter) - Trend Tighter.
• LCDX12 (65% recovery) Px $+1.53 to $81.75 / -93.27bps to 939.04 - Trend Tighter.
• MCDX12 +2bps to 180bps. - No Trend.
• CDR Counterparty Risk Index fell 1.64bps (-1.08%) to 150.15bps (8 wider - 7 tighter).
• CDR Government Risk Index rose 4.04bps (6.61%) to 65.19bps..
• DXY weakened 0.88% to 79.26.
• Oil rose $4.82 to $66.49.
• Gold rose $21.7 to $979.05.
• VIX fell 3.71pts to 28.92%.
• 10Y US Treasury yields rose 1bps to 3.46%.
• S&P500 Futures gained 3.75% to 918.1.

Comments

[conceptwizard:]

Thank you for the update. The dollar is on a toboggan ride. This is shoving world currencies higher just when they dont want it. some countries are facing selling their own currency just to keep it down. Canada for one has not had this gun out of the closet for decades. My data has the dollar slipping farther.

May 30 08:33 AM

[saluki65:]

I don't understand what he is saying. Should speak in plain english and skip the jargon and trying to be flashy

May 30 09:32 AM

[Moon Kil Woong:]

Saluki65: He is discussing not just the rise and fall of the premiums for credit but also the spreads. His data is real and pertinent, although somewhat devoid of conclusions. Ergo, conclusions are more often than not contrived after the fact.

If you watch too many financial news shows you are missing out on the real world. That is a world filled with information exactly like this. People who watch Cramer or listen to the the Treasury and Fed are the ones who get their lunch eaten simply because they are living in a false reality. One made by oversimplification, contradiction, and often illogic. The simple fact is, if the Fed and Treasury believed in their job, that means they believe in a free market. If they believed in a free market they would tend to also believe in an efficient market theory, which completely negates the reason for their existence which is to predict the market and work to negate the business cycle with monetary stimulus and interest rate maniupulation. Which according to efficient market theory would be factored in even if, like in today's world, they confound the market by rewarding absolute and utter failure. Thus they perpetuating a dysfunctional market which can not recover simply because it ceases to be efficient to to their own extraordinarily bad judgement. Making you wonder if their purpose is to provide economic stability or just empower themselves, insure their own prosperity, and make merry off of other perople's toil. After all, if they believed in an efficient market theory, the only reason for their actions simply are to find a way to cheat.

So... back to my point, question anyone trying to feed you a completely regurgitated line. Even take me with some measure of skepticism. I do every time I make a trade.

May 30 10:08 AM

[Joanito:]

Won't be long now before the government minions pull the plug on this rally. Most of the biggies have had a chance to issue a ton of debt into a receptive market. They'll be able to limp along for a while. But, before the speculators of the world go getting all ahead of themselves, and really tank the dollar causing commodity inflation to spike even higher than the ridiculous run up in May (all this in a world that is awash in excess capapity?), and before the 10 yr yield curve has an even more absurd blowout, which would push the 30 yr/fixed into the mid to high 5% range (quickly microwaving all green shoots predicated on the great housing bottom call) I believe these events could unfold. Someone flicks THE switch and the GS SLP machine goes into reverse which should be enough to tank stock indeces around the world. This sudden change accomplishes several things:
1) It would breath new life into the risk averson trade helping the feds move some more debt at lower long term yields.
2) Inflation cools off a little before higher oil (and other) prices nuke any economic recovery, squeezing businesses into choosing between buying gas and other stuff or letting go of even more employees, and the consumer into choosing between necessities like food or paying their already worthless mortgage, making the "worst case scenario" as outlined in the "stressful" tests a reality sometime this summer, not in 2011.
3) It would allow GS and others to show massive realized gains through long trades off the March lows, just in time for Q2 earnings.
4) Certain very large players would be reminded (or maybe it is they who would do the reminding) that most of the world has just come off a a twenty year construction spree, and that speculation in hard assets comes with high risk especially when demand is anemic at best. Better stick to something relatively safe like buying up excess U.S. debt. If the dollar keeps tanking, Americans will never be able to afford to buy imports, not to mention that the U.S. would, over a few years, become a net exporter at the expense of the export based economies around the world.

May 30 10:19 AM

[tunaman4u2:]

Look at the last minute of trading Friday where volume in 1 minute was pretty much equal to the volume of the entire market that day... That takes serious money & are only a few players who can pull that off... If they are pushing up the DOW with 1 minute left in the day do you believe they are buy & hold investors or will they dump after they pump it up some more? Fridays close was a clear indication of manipulation, programmed trade that makes me scared to both buy as they can dump that fast or short as they can push it up just a fast...
Small investors like me can study fundamentals all day long but a push like that 1 minute prior to close is NOT fundamental based!

May 30 10:59 AM

[John Lounsbury:]

I never thought I'd live to see the day when the credit markets had this much excitement. Oh, for the good old days when credit markets were the place where the excitement was making a basis point or two per day on clever trading or longer term positions.

The efficient markets that Moon longs for may never have existed outside of a textbook, but the concept is in utter turmoil today as government, Federal Reserve and individual super-sized players try to out-manuever each other in an end game of manipulation.

Anyone who is successful investing on valuation today - my hat is off to you. Assessing value requires visibility to future earnings. Current earnings are not made of whole cloth. The fibers have not even been gathered to make the thread which can be spun into cloth, when it comes to future earnings.

Especially in financials, with the recent accounting rule changes, earnings can be manipulated to be anything the firm wants them to be, even to being positive when going bankrupt.

May 30 11:14 AM

[dcb:]

I called on this site almost exactly when the manipulation was happening. I do not understand why people won't just say goldman by name. they had to make sure we hit a higher high that the day before and that the descending triangle was broken. the bottom of that triangle would have been broken a long time ago as money flows have been net neg out of the market since april 20th. the upwards manipulation started on about 3/20 when the exchange moved up in opposite direction of the appropriate currency flows.

a resonate situation has been created by keeping the S&P from falling where both currency flows and foreign stocks prices are going through the roof and the dollar is collapsing. when all the money flows fit together you see these huge moves. the reason these huge moves have happened is because goldman hasn't allowed the market to fall thus acting as a global brake on all these money flows

from 3/20 to 4/15 they drove up the market. since they have been getting called out in public more and more for this behavior they are now using much more targeted buying at specific points to prevent a drop as people have left the market

The interesting this is that behavior on other markets in order to influence the futures has been investigated and prosecuted. That will not happen to goldman. I recall it being a commodity fund that deals with oil specifically. I have written the SEC, NYSE, etc with evidence and gotten not one reply. When I complained about the name of the vanguard precious metals and mining fund (because it has little exposure to what it states the fund is about) I received a prompt reply. I have also submitted data with links to the appropriate congressional and senate oversight boards, the NY attorney general, The NY times, Bloomberg , and members of the legislature who actually appear interested in getting to the truth.

I ask beg and plead you to make contact with such people when funny things happen. Only through the regular exposure of such practices will we be able to gather the momentum to stop it. If you want to learn more about the games being played please check out goldmansachs666.com . The company is suing the owner of the site for using the name, they have made no accusations that any of the information on the site is false. You know somebody is onto something when such a big firm spends so much time and effort to get you shut down.


On May 30 10:59 AM tunaman4u2 wrote:

> Look at the last minute of trading Friday where volume in 1 minute
> was pretty much equal to the volume of the entire market that day...
> That takes serious money &amp; are only a few players who can pull
> that off... If they are pushing up the DOW with 1 minute left in
> the day do you believe they are buy &amp; hold investors or will
> they dump after they pump it up some more? Fridays close was a clear
> indication of manipulation, programmed trade that makes me scared
> to both buy as they can dump that fast or short as they can push
> it up just a fast...
> Small investors like me can study fundamentals all day long but a
> push like that 1 minute prior to close is NOT fundamental based!

May 30 11:47 AM

[dcb:]

By David Weidner, MarketWatch

(Editor's Note: Starting Thursday, catch "Writing on the Wall" on WSJ.com as well as MarketWatch).

NEW YORK (MarketWatch) -- Lloyd Blankfein must be the luckiest guy on Wall Street.

He leads one of the Street's biggest bailed-out firms, but unlike other companies propped up by taxpayers, Blankfein's Goldman Sachs Group Inc. /quotes/comstock/13*!g... (GS 144.57, -0.08, -0.06%) is far more profitable. And it's poised to become a more influential force with greater market share.

Different from American International Group Inc. /quotes/comstock/13*!a... (AIG 1.69, +0.02, +1.20%) or Citigroup Inc. /quotes/comstock/13*!c... (C 3.72, +0.05, +1.36%) , Goldman hasn't had to forfeit an ownership stake in its firm, and its shareholders -- many of them management and employees -- have benefited. Goldman shares trade above $100. That's less than half of where Goldman shares traded at their peak, but far better than the $1 and $3 that AIG and Citigroup shares trade for, respectively.

Since the fall of Bear Stearns Cos. a little more than a year ago, Goldman has taken more than $20 billion in taxpayer cash through loans, payments and backstops. Goldman's latest bailout coup was a $12.5 billion paid out of AIG's $180 billion government cash infusion.

Until it was fully extricated, Goldman always characterized its exposure to AIG as "immaterial," and that its $20 billion notional exposure to AIG was hedged. Turns out that it was -- through government bailouts that didn't exist when Goldman entered the contracts.

Even former New York Luv Guv Eliot Spitzer told journalist Fareed Zakaria on Sunday that he thinks something smells.

"The web between AIG and Goldman Sachs is something that should be pursued," Spitzer said. "Why did [those payments] happen, what questions were asked, why did we need to pay 100 cents on the dollar for those transactions if we had to pay anything, what would have happened to the financial system had it not been paid?"

But the AIG-Goldman affair is just the beginning, under the policy enacted by former U.S. Treasury Secretary Henry Paulson, Goldman's chief executive until 2006. Major competitors have failed or been diminished. Goldman already seems, if not just poised, to be dominating what's left of the investment banking landscape.

We last visited Goldman in the early days of the Troubled Asset Relief Program, or TARP, in October. Then, it appeared Goldman would come out ahead by virtue of avoiding a major investment by a commercial bank. Merrill Lynch had just been sold to Bank of America Corp. /quotes/comstock/13*!b... (BAC 11.27, -0.03, -0.27%) , and Morgan Stanley /quotes/comstock/13*!m... (MS 30.32, +0.89, +3.02%) had just sold a 20% stake to Tokyo's Mitsubishi UFJ. See full story.
'Most powerful, successful'

Five months later, Goldman's position in the marketplace looks even stronger -- its future even more brilliant.

"Goldman Sachs has the most powerful investment banking franchise and the most successful trading operation on Wall Street," Brad Hintz of Bernstein Research wrote Friday, adding that he's been told "new leverage limits are not expected to impact Goldman's trading performance."

May 30 11:53 AM

[LKofScotland:]

Financial Armageddon only gets reported online. Television is always about green shoots when it comes to money and the market. Still, "if it bleeds it leads" so once the bullets start to fly on an organized level then you'll see TV come into its element. Those were the newsreals of Vietnam you still have a hard time finding--the fall Saigon stuff. Also definitely agree with greed64. Bad time to be shorting the EQUITY markets. The CEO's job is pretty simple right now--manage your debt load properly (preferably by eliminating it.) DEBT markets on the other hand have just plunged into the abyss. There is issuance which is supportive of equities and goes a long way towards explaining the tremendous gains in the S&P in the past three months. But "government" at ALL levels has gone completely bonkers in here. Since they are governments they have an unlimited capacity to act upon their hate which is usually expressed through the court system, taxes and the police. If you're rich already I'd be taking a nice relaxing fishing vacation in the Abacos for the next few months (although watch out for those hurricanes) as Uncle Sam and all his local yokel clown posse types points the cannon at their own and devours their young.

May 30 09:53 PM