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Comments & Movers

4/29/2010

Daily Credit Update 4/29/2010 | Turnaround and Stopy Tim Backshall, Chief Strategist

Spreads rallied today as bailout chatter in Europe andmarginally improving macro data in the US supported

ome risk appetite. IG credit traded down to Monday'sights but was unable to break down, pulling off theights into the close, though notably its widest levels ofhe day were well below yesterday's tightest levels.

HY and equities remain weaker than Monday and Friday'slose (unlike IG) which suggests that while the last two daysave seen some recovery from the early week dips, theecovery is more quality focused and bonds not equities - aheme that we have seen again and again during this run.

TSYs also saw strength today as money flowed into USssets (risky or riskless). LCDX slightly underperformed HY

oday and while in absolute terms HY outperformed IG,mpirically they were about unch adjusted for beta. With theally in Europe underway, US opened gap tighter and by thelose ITRX ExFINLs were 7bps tighter at 81bps compared toG exFINLs 2.5bps tighter at 86bps - reverting to a moreormal differential for now.

Sovereign risk had a good day as it appears that everyonelways is too big to fail and bailouts are free with a Ventiappuccino or bottle of Grappa. The self-serving IMF

members appear to be able to conjure EUR100bn's and itppears the voluntary restructuring that we have beeniscussing is on its way. CDS compressed another 72bps

oday (now at 630bps in 5Y) but remain handily rich toGGBs. As we have said so many times before, a bailout isot a solution and merely removes the immediate threat ofbsolute default. EUR100bn will see Greece through theext three years of interest and principal payments only - butow will they fund their deficits? What cost? We note the 5%MF/EU chatter is now less than what Portugal will pay to refisurely they'll want some of that too?

t is clear from the pattern of bond underperformance vsCDS in Greece, Portugal, Spain, and now the UK that realmoney is leaving European bond markets and today's rally inTSYs and modest duration extension (flattening) in the facef a decent risk rally (and gold rallying) suggests that evenhough there was some EUR strength DXY weakness, flowsre moving back home. On the UK, note that we sawonsiderable derisking in DTCC data last week on littleecompression in spreads unch - which suggests dealersnwinding Gilts (given Gilts underperformance of CDS) - not good sign.

Exhibit 1. UK CDS-Cash Neg Basis following the sampath as Greece, Portugal, and Spain

Breadth was entirely positive today with high betaoutperforming low beta and FINLs trumping non-FINLs. Ahas been the case recently, a compression day sees theindices outperforming intrinsics in almost every case - IGMain (which crossed back over today), XOver, HY 3Y (nomuch HY5Y), SovX, and ITRX FINLs. In general curvessteepened in the indices but in single names we note 3s5flatteners were almost double steepeners while 5s10s wemixed - so more of the same theme there of risk beingshuffled closer (even on a good day).

TMT were the best performers today in 5Y with CONSumand INDUstrial credits close behind. ENRG was weak wiRIG unfortunately dragging the sector down along with H

It seems the increasingly likely "bailout without strings" foGreece or whoever wants it is a signal to cover shorts onbanks and we saw notable compression today. US bankscaught that positive contagion and were helped by whatappears is some watering down of FINREG (but whoknows). US banks face one unsurmountable obstacle anthat is the refinancing of a wall of TLGP debt. Aside fromevent risk fears, the EU banks went into this crisis in a w

place than the US banks and the recent sell-off in Europehas brought risk more into line with the US in general.

In our broader universe, RIG, HAL, NE, YRCW, RRI, andAPC were the biggest underperformers based on spread(with YRCW standing out in absolute terms). IPG, PDE, (great call Byron!), RCL, AMKR, DPL, CBS, and GT werethe best spread vol based performers in CDS land today

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Comments & Movers

4/29/2010

t was hard to argue that anything technical was driving usoday and it seemed like a lack of sovereign catalysts andome relatively positive macro data were enough for traders

o follow the path of least resistance tighter. I do not think weross back across the channel of glee in IG this time thoughs between systemic event risk in Europe and idiosyncraticeleveraging fears IG has found a new floor - HY of course is beast of its own and will wonder far and wide at the becknd call of its savings-flow-driven master (until it doesn't). IGid manage to close at its 50-day average today afterpending a glorious 3 days above it and if a stop is required,7bps and below that 81bps are decent pivot points with3bps and 98.75bps as upside target/breakout levels forwingers.

Capital Structure ChangesThe great majority of single-names were in agreement todaywith both equity and credit outperrforming. These includedBC 5Y -75bps (-1.51SDs) and Stock +7.96SDs (27.33%),RCL 5Y -20bps (-1.44SDs) and Stock +3SDs (8.08%), JCIY -7bps (-1.28SDs) and Stock +2.19SDs (4.23%), GR 5Y -bps (-1.14SDs) and Stock +1.79SDs (2.94%), MAR 5Y -bps (-1.1SDs) and Stock +2.67SDs (4.96%), GT 5Y -26bps-1.07SDs) and Stock +1.29SDs (3.55%), IP 5Y -7bps (-.04SDs) and Stock +1.26SDs (3.02%), DHR 5Y -4bps (-.04SDs) and Stock +1.35SDs (1.8%), WY 5Y -11bps (-.03SDs) and Stock +1.46SDs (2.88%), VIA 5Y -6bps (-.03SDs) and Stock +1.11SDs (1.74%), BWA 5Y -6bps (-.98SDs) and Stock +6.01SDs (10.31%), and CMCSA USY -4bps (-0.56SDs) and Stock +3.87SDs (6.33%).

The smallest cohort today were the those agreeing toeteriorate with both equity and credit deteriorating in SO 5Y1bps (+0.26SDs) and Stock -1.87SDs (-1.76%), APA 5Y1bps (+0.29SDs) and Stock -1.8SDs (-3.43%), EK 5Y21bps (+0.46SDs) and Stock -3.92SDs (-16.89%), APC 5Y3bps (+0.64SDs) and Stock -1.76SDs (-4.09%), YRCW 5Y129bps (+1.29SDs) and Stock -1.12SDs (-9.9%), NE 5Y6bps (+1.36SDs) and Stock -1.28SDs (-2.77%), HAL 5Y8bps (+2.17SDs) and Stock -2.19SDs (-5.25%), and RIGY +15bps (+2.77SDs) and Stock -2.99SDs (-7.45%).

The names that showed divergence today were dominated

y credit outperformers such as CAH 5Y -3bps (-0.7SDs)nd Stock -1.25SDs (-1.76%), SWY 5Y -3bps (-0.67SDs)nd Stock -3.73SDs (-5.98%), CAM 5Y -4bps (-0.62SDs)nd Stock -4.38SDs (-12.98%), RYL 5Y -3bps (-0.27SDs)nd Stock -1.46SDs (-3.96%), OKS 5Y -2bps (-0.23SDs)nd Stock -1.97SDs (-1.97%), KR 5Y -1bps (-0.22SDs) and

Stock -1.62SDs (-2.56%), and PG 5Y -1bps (-0.13SDs) andStock -1.52SDs (-1.54%). While the few names that showed

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 +1bp(+0.11SDs) and Stock +1.51SDs (2.46%), HOV 5Y +12b

(+0.18SDs) and Stock +1.95SDs (9.48%), and K 5Y +1b(+0.28SDs) and Stock +4.85SDs (4.62%).

Movers in DetailSpreads were tighter in the US as all the indices improveIG trades 0.3bps tight (rich) to its 50d moving average, wis a Z-Score of -0.1s.d.. At 89.25bps, IG has closed tighteon 46 days in the last 343 trading days (JAN09). The lasfive days have seen IG flat to its 50d moving average.

Indices generally outperformed intrinsics with skewswidening in general as IG's skew decompressed as theindex beat intrinsics, HVOL outperformed but narrowed tskew, ExHVOL outperformed pushing the skew wider, Hskew widened as it underperformed.

18.4% of names in IG moved more than their historical vwould imply as higher vol names outperformed lower volnames by -2.76% to -2.72%. IG's vol is around 4.38% peday period, which leaves 111 names higher vol and 14 lovol than the index.

The names having the largest impact on IG are AmericanInternational Group, Inc. (-17bps) pushing IG 0.13bpstighter, and Transocean Ltd. (+14bps) adding 0.11bps toHVOL is more sensitive with American International Grou

Inc. pushing it 0.54bps tighter, and Ryder System Inc.contributing 0bps to HVOL's change today. The less volaExHVOL's move today is driven by both Arrow ElectronicInc. (-7bps) pushing the index 0.07bps tighter, andTransocean Ltd. (+14bps) adding 0.15bps to ExHVOL.

The price of investment grade credit rose 0.21% to aroun100.48% of par, while the price of high yield credits rose0.46% to around 100.59% of par. ABX market prices arehigher (improving) by 0.08% of par or in absolute terms,0.21%. Volatility (VIX) is down -2.64pts to 18.7%, with 10TSY rallying (yield falling) 3.7bps to 3.73% and the 2s10scurve flattened by 0.5bps, as the cost of protection on US

Treasuries fell 3bps to 37bps. 2Y swap spreads widened1.4bps to 17.94bps, as the TED Spread tightened by 0.2to 0.18% and Libor-OIS deteriorated 0.4bps to 11.6bps.

The Dollar weakened with DXY falling 0.38% to 82.066, Orising $2.15 to $85.37 (outperforming the dollar as the vaof Oil (rebased to the value of gold) rose by 2.45% today2.2% rise in the relative (dollar adjusted) value of a barre

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Comments & Movers

4/29/2010

il), and Gold increasing $1.5 to $1167.2 as the S&P rallies1205.2 1.27%) outperforming IG credits (89.25bps 0.21%)

while IG, which opened tighter at 92bps, underperforms HYredits. IG13 and XOver13 are -4.87bps and -26.5bps

espectively while ITRX13 is -8.75bps to 89.25bps.

Dispersion fell -1.8bps in IG. Broad market dispersion is lesshan historically expected given current spread levels,ointing to a more sanguine view of credits as investorsiscriminate less between names, with dispersion increasing

more than expected today indicating a less systemic andmore idiosyncratic spread widening/tightening at the tails.

6% of IG credits are shifting by more than 3bps and 58% ofhe CDX universe are also shifting significantly (more thanhe 5 day average of 47%). The number of names wider thanhe index increased by 4 to 52 as the day's range fell to.75bps (one-week average 3.9bps), between low bid at

8.5 and high offer at 92.25 and higher beta credits (-3.21%)utperformed lower beta credits (-2.39%).

n IG, tighteners outpaced wideners by around 27-to-1, with credits wider. By sector, CONS saw 0% names wider,

ENRGs 24% names wider, FINLs 0% names wider, INDUs% names wider, and TMTs 0% names wider. Focusing onon-financials, Europe (ITRX Main exFINLS) outperformed

US (IG exFINLs) with the former trading at 81.81bps and theatter at 85.68bps.

Cross Market, we are seeing the HY-XOver spreadecompressing to 55.59bps from 40.72bps, and remains

bove the short-term average of 53.56bps, with theHY/XOver ratio rising to 1.13x, above its 5-day mean of.12x. The IG-Main spread decompressed to 0bps from -bps, but remains below the short-term average of 0.98bps,

with the IG/Main ratio rising to 1x, below its 5-day mean of.01x. Among the HY names, we see higher risk names>500bps) underperforming lower risk (

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Comments & Movers

4/29/2010

ndex/Intrinsics ChangesCDR 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 -2.74bpso 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 -8 tighter 19 steeper - 11 flatter) - Trend Wider.

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

o 484.1 (FV -13.5bps to 450.69) (2 wider - 94 tighter 5 steeper - 34 flatter) - Trend Wider.

LCDX14 (70% recovery) Px $+0.37 to $99.5 / -9.92bps to63.07 - Trend Wider.

MCDX14 -5bps to 124bps. - No Trend.

TRX13 Main --8.75bps to 89.25bps (FV--4.75bps to1.01bps).

TRX13 XOver --26.5bps to 429.5bps (FV--16.42bps to18.75bps).

TRX13 FINLs --15.5bps to 119bps (FV--10.54bps to24.67bps).

CDR Counterparty Risk Index fell 11bps (-8.31%) to21.27bps (1 wider - 13 tighter).

CDR Government Risk Index fell 5.14bps (-5.59%) to6.79bps..

DXY weakened 0.42% to 82.04.

Oil rose $2.26 to $85.48.

Gold rose $1.3 to $1167.

VIX fell 2.64pts to 18.44%.

0Y US Treasury yields fell 3.9bps to 3.73%.

S&P500 Futures gained 1.24% to 1204.8

Single-Name MoversToday's biggest absolute movers in IG were Transocean(+14bps), Halliburton Company (+9bps), and Duke EnergCarolinas, LLC (+6bps) in the wideners, and AmericanInternational Group, Inc. (-17bps), SLM Corp (-10.5bps),Alcoa Inc. (-10.25bps) in the tighteners. Today's biggestpercentage movers in IG were Transocean Ltd. (+18.06%Halliburton Company (+15.65%), and Duke EnergyCarolinas, LLC (+9.6%) in the wideners, and JohnsonControls Inc (-8.97%), News America Inc (-8.28%), and CCorporation (-7.97%) in the tighteners.

In Main, the biggest percentage movers were SuedzuckeAG (+1.21%), France Telecom (+0.97%), and Bouygues(0%) in the wideners, and Enel SpA (-14.04%), CreditAgricole SA (-12.94%), and Banco Bilbao Vizcaya Argen

SA (-12.56%) in the tighteners.The largest absolute movein Main were Suedzucker AG (+1.25bps), France Teleco(+0.5bps), and Bouygues (0bps) in the wideners, and BaEspirito Santo SA (-31.67bps), Banco Bilbao VizcayaArgentaria SA (-24.5bps), and EDP-Energias de PortugaS.A. (-22.5bps) in the tighteners.

The biggest percentage movers in XOver were NordicTelephone Company Holding ApS (+3.96%), InfineonTechnologies AG (+2.16%), and BCM Ireland Finance Lt(+0.82%) in the wideners, and Grohe Holding GmbH (-13.09%), UPM-Kymmene Oyj (-9.4%), and Stora Enso O8.33%) in the tighteners.The largest absolute movers in

XOver were BCM Ireland Finance Ltd (+10.2bps), NordicTelephone Company Holding ApS (+7.33bps), and InfineTechnologies AG (+3.92bps) in the wideners, and GroheHolding GmbH (-115.46bps), Seat Pagine Gialle SpA (-105.19bps), and Norske Skogindustrier ASA (-90.89bps)the tighteners.

In the names of the HY index, today's biggest percentagemovers were RRI Energy, Inc. (+1.41%), Eastman KodakCo. (+1.31%), and Constellation Brands, Inc. (0%) in thewideners, and Brunswick Corp. (-19.05%), AmkorTechnology Inc. (-12.17%), and iStar Financial Inc. (-8.96in the tighteners. The largest absolute movers in HY werRRI Energy, Inc. (+9.9bps), Eastman Kodak Co. (+9.2bpand Constellation Brands, Inc. (0bps) in the wideners, aniStar Financial Inc. (-90.03bps), Brunswick Corp. (-80bpsand Amkor Technology Inc. (-65.15bps) in the tighteners

The CDR Counterparty Risk Index Series 2 (of brokers abanks) fell -11bps (or -8.31%) to 121.27bps. Dresdner BaAG (6.14bps) is the worst (absolute) performer among thbanks/brokers of the CDR Counterparty Index, whilst

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Comments & Movers

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Dresdner Bank AG (6.53%) is the worst (relative) performer.Goldman Sachs Group Inc (-22bps) is the best (absolute)erformer among the banks/brokers of the CDR

Counterparty Index, and Goldman Sachs Group Inc (-

4.33%) 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)erformer, and Foster's Group Limited (-7.94%) is the bestrelative) performer.

The CDR Asian Index fell -0.9bps (or -0.97%) to 91.39bps.SK Telecom Co Ltd (7.34bps) is the worst (absolute)erformer, whilst SK Telecom Co Ltd (11.89%) is the worstrelative) performer. Reliance Industries Ltd. (-7.78bps) ishe best (absolute) performer, and Hutchison Whampoa Ltd

-8.14%) is the best (relative) performer.