* High Yield – High Yield rates fell 8.7 bps last week, ending the week at 5.92% versus 6.01% the prior week.
* Euribor-OIS – The spread tightened by 2 bps to 11 bps. Europe continues to mend and rally.
* Markit MCDX – Last week spreads tightened 4 bps, ending the week at 121 bps versus 125 bps the prior week. Taking a step back, municipal credit default risk has been steadily falling since its peak of 230 bps in November 2011.
* Chinese Steel – Steel prices in China rose 2.0% last week, or 74 yuan/ton, to 3750 yuan/ton. Chinese steel has been rising since the end of November 2012.
* 2-10 Spread – Last week the 2-10 spread widened 11 bps to 162 bps.
* XLF Macro Quantitative Setup – Quantitatively, the Financials remain bullish TRADE and TREND (short & intermediate term). Our Macro team’s quantitative setup in the XLF shows 2.0% upside to TRADE resistance and 1.1% downside to TRADE support.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 6 of 12 improved / 2 out of 12 worsened / 4 of 12 unchanged
• Intermediate-term(WoW): Positive / 10 of 12 improved / 2 out of 12 worsened / 0 of 12 unchanged
• Long-term(WoW): Positive / 8 of 12 improved / 1 out of 12 worsened / 3 of 12 unchanged
1. American Financial CDS - Swaps tightened for 23 out of 27 domestic financial institutions. All large caps were tighter except for GS, which widened 1 bp.
Tightened the most WoW: MBI, AGO, MS
Widened the most WoW: MTG, GS, TRV
Tightened the most WoW: MMC, ACE, GNW
Widened the most/ tightened the least MoM: MBI, SLM, WFC
2. European Financial CDS - EU Financial swaps were mixed this past week, with German and French swaps nominally higher while Spanish and Italian swaps continued to tighten.
3. Asian Financial CDS - Asian Financials were tighter across the board, as rising expectations for Japan's new monetary initiatives continue to fuel a rally.
4. Sovereign CDS – Sovereign swaps were mixed, with Italy, Spain, Ireland and France tighter, while the US, Germany, Portgual and Japan were flat or wider by 1 bp. mostly tightened over last week.
5. High Yield (YTM) Monitor – High Yield rates fell 8.7 bps last week, ending the week at 5.92% versus 6.01% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 8.5 points last week, ending at 1763.15.
7. TED Spread – The TED spread fell 0.1 basis points last week, ending the week at 23.6 bps this week versus last week’s print of 23.7 bps.
8. Journal of Commerce Commodity Price Index – The JOC index rose 1 point, ending the week at 8.8 versus 7.7 the prior week.
9. Euribor-OIS spread – The Euribor-OIS spread tightened by 2 bps to 11 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 – Last week spreads tightened 4 bps, ending the week at 121 bps versus 125 bps the prior week. Taking a step back, municipal credit default risk has been steadily falling since its peak of 230 bps in November 2011. 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 2.0% last week, or 74 yuan/ton, to 3750 yuan/ton. Chinese steel has been rising since the end of November 2012.
13. 2-10 Spread – Last week the 2-10 spread widened 11 bps to 162 bps. We track the 2-10 spread as an indicator of bank margin pressure.
14. XLF Macro Quantitative Setup – Quantitatively, the Financials remain bullish TRADE and TREND (short & intermediate term). Our Macro team’s quantitative setup in the XLF shows 2.0% upside to TRADE resistance and 1.1% downside to TRADE support.
Joshua Steiner, CFA
