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Takeaway: Tightening muni swaps and widening yield spreads are two notable positives helping to offset modestly growing weakness in Europe.

Key Takeaways:

* U.S. Financial CDS -  Bank of America, Citi, Morgan Stanley and Goldman all widened by 8-13 bps, reflecting the marginal deterioration in EU conditions. On the other side, we again saw mortgage insurers tighten, reflecting the ongoing positive perception around housing's recovery.

2-10 Spread – Last week the 2-10 spread widened to 174 bps, 2 bps wider than a week ago.

* Markit MCDX  – Last week spreads tightened 7 bps, ending the week at 100.49 bps versus 107.83 bps the prior week. 

Euribor-OIS spread – The Euribor-OIS spread widened by 2 bps to 12 bps. 

High Yield (YTM) Monitor – High Yield rates rose 15 bps last week, ending the week at 6.11% versus 5.96% the prior week.

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Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 3 of 12 improved / 3 out of 12 worsened / 7 of 12 unchanged

 • Intermediate-term(WoW): Positive / 6 of 12 improved / 4 out of 12 worsened / 3 of 12 unchanged

 • Long-term(WoW): Positive / 8 of 12 improved / 0 out of 12 worsened / 5 of 12 unchanged

1. American Financial CDS -  Swaps widened for 20 out of 27 domestic financial institutions. Bank of America, Citi, Morgan Stanley and Goldman all widened by 8-13 bps. This was the largest week-over-week increase we've seen in some time among the large cap U.S. financials, reflecting the marginal deterioration in EU conditions. On the other side, we again saw mortgage insurers tighten, reflecting the ongoing positive perception around housing's recovery.

Tightened the most WoW: MBI, HIG, RDN

Widened the most WoW: MS, BAC, C

Tightened the most WoW: GNW, AGO, MBI

Widened the most MoM: COF, BAC, MTG

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2. European Financial CDS - Swaps were mostly wider among European financials last week. No individual companies stuck out, but broadly speaking the Spanish, Italian, and, to a lesser extent, French banks were all wider.

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3. Asian Financial CDS - There was relatively little movement among Asian financials last week, with the exception of Daiwa, which tightened 21 bps.

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4. Sovereign CDS – Sovereign swaps were mixed last week. We saw modest further widening from Italy and Spain, while Ireland tightened. Italy and Spain have widened 46 bps and 42 bps, respectively, over the past month. The U.S., Japan, Germany and France were all essentially unchanged. 

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5. High Yield (YTM) Monitor – High Yield rates rose 15 bps last week, ending the week at 6.11% versus 5.96% the prior week.

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell -3.8 points last week, ending at 1765.43.

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7. TED Spread Monitor – The TED spread fell 0.3 bps last week, ending the week at 22.4 bps this week versus last week’s print of 22.75 bps.

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8. Journal of Commerce Commodity Price Index – The JOC index fell -0.1 points, ending the week at 11.45 versus 11.5 the prior week.

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9. Euribor-OIS spread – The Euribor-OIS spread widened by 2 bps to 12 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. 

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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.  

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11. Markit MCDX Index Monitor – Last week spreads tightened 7 bps, ending the week at 100.49 bps versus 107.83 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. 

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12. Chinese Steel – Steel prices in China rose 0.9% last week, or 35 yuan/ton, to 3790 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

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13. 2-10 Spread – Last week the 2-10 spread widened to 174 bps, 2 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

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14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.9% upside to TRADE resistance and 1.5% downside to TRADE support.

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Joshua Steiner, CFA