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Reallocation

27 March 2017 by lberuti

Credit never really felt vulnerable today. Despite a wider open - iTraxx Main (ITXEB) +1.5bps @ 76.5bps and iTraxx Crossover (ITXEX) +8bps @ 300bps - on the back of doubts surrounding Mr Trump’s ability to push through his reform agenda following the health care bill fiasco, the price action was strong from start to finish. Sellers of protection emerged early on, as some investors were eager to use these better entry points to get rid of hedges or add risk, and credit outperformed equities throughout the session. Volumes were not massive, but reallocations appear under way. Risk was transferred from US into European credit in the ETF space, which translated into a 1bp underperformance of CDX IG compared with ITXEB and a 5bps underperformance of CDX HY compared with ITXEX. The probability that the Federal Reserve will raise rates two more times this year has dropped back below 50%. That is quite supportive for IG credit, and forced another round of bullish decompression. Financials are still trading very firm, despite some questions asked about UK banks as Article 50 is about to be triggered, and the spread between ITXEB and iTraxx Financials is down to 13bps – 75bps vs 88bps -, the tightest it has been in almost a year.

Oil-Fuelled Decompression

24 March 2017 by lberuti

After a few months a stability, oil experienced a tumultuous month of March. Over the last four weeks, it has slid more than 10% amid supply woes. Russia’s policy makers are leaning on the cautious side. They said they were using below consensus estimates - $50/barrel on average in 2017, falling to $40/barrel at the end of 2017 and then staying near that level during the 2 following years – to establish growth forecasts in an economy still driven by oil to a large extent, adding to the market nervousness in doing so. That certainly goes a long way in explaining the underperformance of the energy heavy CDX HY compared to its investment grade benchmark equivalent, CDX IG. Since the 24th February, CDX IG series 27 – series 28 did not exist at the time – has tightened by 3bps to 60bps, while CDX HY series 27 has widened by 7bps to 327bps. Using a standard beta and thus assuming 1bp of CDX IG is equivalent to 5bps of CDX HY, it means HY has underperformed IG by almost 1 percentage point in cash price over the last 4 weeks.

Does One Sparrow Make A Summer?

23 March 2017 by lberuti

The credit market was a bit soft first thing this morning. However, as the day progressed, a general risk-on tone emerged in the higher beta CDS names. In particular, UK retailers were active following NXT’s ( Next Plc ) numbers. Since 2016, its 5-year risk premium has experienced a bumpy ride, and has been on a constant widening trajectory. Many analysts thought that guidance would be lowered again today, but NXT’s CEO surprised them by maintaining his forecast that profit will fall between £680mln and £780mln. With the fall in the pound since the vote to leave the EU spurring inflation and squeezing disposable income, the mere confirmation that no additional weakness should be expected was enough to cheer investors. They sent the stock up 8% and the 5-year CDS a more modest 4bps tighter at 132bps.

Always Read The Small Prints

22 March 2017 by lberuti

The new series of CDX HY, the benchmark for high yield credit in the US, will be launched next Monday. Series 28 will bear a Jun 2022 maturity like all other 5-year indices launched in March 2017, and, like previous series of CDX HY, it will include 100 constituents. That might not last long though. When SHLD ( Sears Holdings Corp ) released their annual 10-K filing yesterday, they added so-called going concern language. Acknowledging “substantial doubt” about its future raised fresh concerns about the survival of the company among investors who sent the stock tumbling down and the 5-year risk premium through the roof. The company tried during the day to calm things down and said they remained focused on executing their transformation plan, which includes assets sales and an aggressive cost cutting program. It stopped the rot, but SHLD was still the worst performer of the consumers sector today.