MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER

This week's notable callouts include European sovereign spreads continuing their dizzying ascent and the Baltic Dry Index rolling over to its lowest level since May.

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Negative / 1 of 11 improved / 8 out of 11 worsened / 2 of 11 unchanged
  • Intermediate-term (MoM): Negative / 1 of 11 improved / 6 of 11 worsened / 4 of 11 unchanged
  • Long-term (150 DMA): Negative / 2 of 11 improved / 5 of 11 worsened / 4 of 11 unchanged

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - summary

1. US Financials CDS Monitor – Swaps were largely wider across domestic financials last week, tightening for only 3 of the 28 issuers and widening for 25.  Moneycenter and broker swaps widened 10% on average.  MBI swaps fell on news that BAC may have settled with the insurer. 

Widened the most vs last week: JPM, AXP, ALL

Tightened the most vs last week: MBI, AGO, PMI

Widened the most vs last month: COF, ALL, AIG

Tightened the most vs last month: MTG, RDN, PRU

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - us cds

2. European Financials CDS Monitor – Banks swaps in Europe were mostly wider last week.  37 of the 38 swaps were wider and 1 tightened.   ISDA ruled that the Bank of Ireland experienced a credit event (restructuring), triggering a settlement on the credit default swaps.  Accordingly, swaps are not trading this week for Bank of Ireland. 

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - euro cds

3. European Sovereign CDS – European sovereign swaps continued to blow out significantly higher, increasing an average of 13% WoW.

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - sov cds

4. High Yield (YTM) Monitor – High Yield rates edged higher last week, ending at 7.37 versus 7.31 the prior week.

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - high yield

5. Leveraged Loan Index Monitor – The Leveraged Loan Index was flat last week, ending at 1609. 

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - lev loan

6. TED Spread Monitor – The TED spread fell slightly, ending the week at 24.7 versus 22.6 the prior week.

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - ted

7. Journal of Commerce Commodity Price Index – Last week, the JOC index fell 2.4 points to 7.3. 

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - JOC

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose 72 bps, ending the week at 1758.

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - greek bonds

9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on six 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. We track the 14-V1.  After bottoming in April, the index has been moving higher.  Last Friday, spreads closed at 117 bps.

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - mcdx

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  Last week the series fell to its lowest level since May, closing at 1353.

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - baltic dry

11. 2-10 Spread – We track the 2-10 spread as a proxy for bank margins.  Last week the 2-10 spread tightened 9 bps to 255 bps.   

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - 2 10

12. XLF Macro Quantitative Setup – Our Macro team sees the setup in the XLF as follows:  1.3% upside to TRADE resistance, 1.5% downside to TRADE support.

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - XLF

Margin Debt Back Off of Recent Highs


We publish NYSE Margin Debt every month when it’s released.  This chart shows the S&P 500, inflation adjusted back to 1997, along with the inflation-adjusted level of margin debt (expressed as standard deviations from the long-run mean).  As the chart demonstrates, higher levels of margin debt are associated with increased risk in the equity market.  Our analysis shows that more than 1.5 standard deviations above the average level is the point where things start to get dangerous.  In May, margin debt decreased $5.3B to $315B.  On a standard deviation basis, margin debt fell to 1.36 standard deviations above the long-run average.

One limitation of this series is that it is reported on a lag.  The chart shows data through May.

MONDAY MORNING RISK MONITOR: SWAPS WIDEN FURTHER - margin debt

Joshua Steiner, CFA

Allison Kaptur