Spreads were wider in the major indices today as single-names actually led the way weaker today and high beta underperformed low beta with wideners outpacing tighteners by almost 8-to-1. Credit continues to underperform stocks and a lifting in compression trades today and strength in TSYs suggests far less confidence in the recovery in fixed income investors than equity investors.
It is clear to us that heading into earnings season that credit markets are much more nervous than stocks and vol. Maybe this makes some sense given the relative outperformance of credit recently (especially HY) but it is important to note the relative size of flow into bonds vs stocks and how much weighting should be given to the bond market (think TSY and corporate) opinion. This weakness is best played (in our opinion) in the short ExHVOL or more convoluted HY-IG over XOver-Main trade. IG12 remains just above its 50d moving average but modestly cheap to intrinsics as HY12 skews compress considerably.
Consumer Credit dropped a worse than expected $12bn, pushing total credit back to Jul07 levels as revolving credit fell much more than non-revolving credit (perhaps ominously signaling less credit card purchases and a CfC hangover). AXP and (more so) COF widened notably after the number came out as financials in general were weak today and we note once again that GS was underperforming.
PIMCO deciding to desert the sinking CIT ship is very interesting to us and it appears from the jump in CDS today that some of the remaining committee decided to buy some protection. 3s, 5s,and 7s were active and wider today with less activity at the short-end as the curve inverted more and 5Y broke above 40%upf. We note, somewhat amazedly (if there is such a word) that this is the widest since only 09/10 and solid trading for a few months before that in the mid to high 40s and a peak in July just over 50% up.
The notable drop in HY12 and 13 (first time in 5 days) seems to indicate that we are seeing a chink in the ‘risk on’ armor going into earnings and maybe the HY13-IG12 decompression trade is the preferred vehicle of choice here (avoiding CIT specific exposure as both have it and playing more systemically as well as cheaper upfront in HY13). This might help to explain IG12’s relative outperformance today also. NOTE – late in the day we saw IG13 gap a little tighter and end up outperforming IG12 as we suspect the HY-IG decompression trades took hold (or more simply compression trades were lifted).
Overnight we saw concerns from the Fed that banks are slow to recognize CRE losses (no big surprise to us there eh?), the Corus assets getting bid at 60c on the dollar (and the winning bid 20c higher than others), and today we note CMBX prices fell across the board with more recent vintages actually suffering worse today. ABX prices rose a smidge on the day as builders weakened (with PHM relative underperformer) as tax credit extension concerns reappeared (BZH and HOV both popped handily back above 1000bps). The higher quality REITs hung in there today as CMBX weakened which might be more of the same implied loss bet that we have seen discussed around the market (although SPG and BXP did weaken a smidge).
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.