Euribor-OIS vs TED Spread: This week the Euribor-OIS and the TED spread flashed conflicting signals. The TED spread rose 5 bps while the Euribor-OIS fell 2 bps.
European Bank CDS: Bank CDS in Europe was mostly tighter week-over-week. German and British banks tightened, while Spanish and Italian bank swaps were generally wider. Greek bank swaps were flat, even after Greece received a disbursement of €34.4B tranche of bailout funding last week.
American Bank CDS: Swaps were broadly tighter for domestic banks last week, with the average issuer seeing roughly 17 bps of improvement. The Moneycenter banks tightened the most on average (9 bps week-over-week). MBIA was the lone hold out, widening 75 bps to 1158.
High Yield: The average rate on high yield corporate debt fell 9 bps week-over-week to 6.22%
MCDX: Our preferred measure of municipal default risk rose 5 bps week-over-week.
2-10 Spread: The 2-10 spread widened 8 bps week-over-week. That said, the longer-term trend of down, down, down is showing no signs of abating.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 5 of 12 improved / 3 out of 12 worsened / 5 of 12 unchanged
• Intermediate-term(WoW): Positive / 6 of 12 improved / 3 out of 12 worsened / 4 of 12 unchanged
• Long-term(WoW): Positive / 7 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged
1. American Financial CDS – Swaps tightened for 26 out of 27 domestic financial institutions. The Moneycenter banks and Large brokers tightened by 9 bps on average, while consumer finance companies and insurance companies tightened an average of 12 bps and 6 bps, respectively.
Tightened the most WoW: GNW, AIG, C
Widened the most/ tightened the least WoW: MBI, MTG, SLM
Tightened the most WoW: GNW, C, GS
Widened the most MoM: ACE, MMC, ALL
2. European Financial CDS – Swaps tightened for 24 out of 37 European reference entities last week. German and British banks tightened broadly, French banks were mixed - half tightening, half widening - and Spanish banks along with Italian banks generally saw swaps widen.
3. Asian Financial CDS – Swaps tightened across the board for all of the reference entities we track. Japanese banks saw the most tightening, while Chinese banks saw the least.
4. Sovereign CDS – European sovereign swaps tightened in the core, but widened in the periphery. Portuguese swaps tightened the most, falling 25 bps to 449 bps while Irish and Italian sovereign swaps widened the most, rising 23 bps and 19 bps, respectively week-over-week.
5. High Yield (YTM) Monitor – High Yield rates fell 9.4 bps last week, ending the week at 6.22% versus 6.32% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 5.7 points last week, ending at 1745.14.
7. TED Spread Monitor – The TED spread rose 5.5 bps last week, ending the week at 28 this week versus last week’s print of 22.6.
8. Journal of Commerce Commodity Price Index – The JOC index rose 2.2 points, ending the week at 3.09 versus 0.9 the prior week.
9. Euribor-OIS spread – The Euribor-OIS spread tightened by 2 bps to 13 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States. Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal. By contrast, the Euribor rate is the rate offered for unsecured interbank lending. Thus, the spread between the two isolates counterparty risk.
10. ECB Liquidity Recourse to the Deposit Facility – The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB. Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system. An increase in this metric shows that banks are borrowing from the ECB. In other words, the deposit facility measures one element of the ECB response to the crisis.
11. Markit MCDX Index Monitor – Spreads widened 4 bps, ending the week at 135 bps versus 131 bps the prior week. 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 16-V1.
12. Chinese Steel –Steel prices in China rose 1.0% last week, or 34 yuan/ton, to 3582 yuan/ton. Since their recent highs on Oct 10, Chinese construction steel prices have fallen ~6.5%. The broader downward trend, which started August of last year, remains intact and is a sign of ongoing weakness in the Chinese construction market. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
13. 2-10 Spread – We track the 2-10 spread as an indicator of bank margin pressure. Last week the 2-10 spread widened to 147 bps, 8 bps wider than a week ago.
14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 1.4% upside to TRADE resistance and 1.0% downside to TRADE support.
Margin Debt – October: +1.19 Standard Deviations
NYSE Margin debt rose to $318 billion in October from $315 billion in September. We like to to look at margin debt levels as a broad contrarian sentiment indicator. For reference, our approach is to look at margin debt levels in standard deviation terms over the period 1. Our analysis finds that when margin debt gets to +1.5 standard deviations or greater, as it did in April of 2011, it has historically been a signal of significant risk in the equity market. The preceding two instances were followed by the equity market losing roughly half its value over the following 24-36 months. Overall this setup represents a long-term headwind for the market. One limitation of this series is that it is reported on a lag. The chart shows data through October.
Joshua Steiner, CFA