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    MARKET EDGES

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Takeaway: We've been focused on HY lately as a potential canary. High yield backed up 8 bps last week. There are few other cautionary signs, however.

Key Takeaways:

* High Yield – High Yield rates rose 8.4 bps last week, ending the week at 5.31% versus 5.22% the prior week. This is the first time in a long time that we've seen high yield move up and the fastest rate of increase year-to-date. While the move isn't especially large, it represents an inflection so we'll be keeping a close eye on HY from here.

2-10 Spread – Last week the 2-10 spread widened 17 bps to 173 bps. While the widening of the yield curve offers modest reprieve for lenders, the associated 8 bps back-up in conventional mortgage rates tamps down refi demand as well as GOS margins.

* European Financial CDS - Major widening (+205 bps) at Greek bank EFG Eurobank caused the average European bank swap to widen by 2 bps, but the median was actually tighter by 6 bps. French, Italian and Spanish banks continued to post overall, steady improvement.

* U.S. Financial CDS -  This was the first week in a long time that mortgage insurer swaps (PMI, RDN) didn't drop meaningfully, a barometer of stabilizing sentiment around the housing market's recovery. 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 5 of 12 improved / 1 out of 12 worsened / 7 of 12 unchanged

 • Intermediate-term(WoW): Positive / 9 of 12 improved / 2 out of 12 worsened / 2 of 12 unchanged

 • Long-term(WoW): Positive / 4 of 12 improved / 0 out of 12 worsened / 9 of 12 unchanged

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1. U.S. Financial CDS -  This was the first week in a long time that mortgage insurer swaps (PMI, RDN) didn't drop meaningfully, a barometer of stabilizing sentiment around the housing market's recovery. To be fair, RDN was lower by 3 bps. Big banks were all tighter, led by Citi, BofA and MS, dropping 7, 6 and 6 bps, respectively. It's also interesting to note the 8 bps widening in spreads on Sallie Mae. We couldn't help but notice last week a greater-than-usual volume of negative press on the student loan industry.

Tightened the most WoW: MBI, AGO, UNM

Widened the most WoW: TRV, XL, SLM

Tightened the most WoW: MBI, BAC, AXP

Tightened the least MoM: MET, UNM, WFC

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2. European Financial CDS - Major widening (+205 bps) at Greek bank EFG Eurobank caused the average European bank swap to widen by 2 bps, but the median was actually tighter by 6 bps. French, Italian and Spanish banks continued to post overall, steady improvement.

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3. Asian Financial CDS - Asian financial swaps were mixed last week with Chinese banks posting very narrow increases, while most of Japan and India's banks were tighter.

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4. Sovereign CDS – Sovereign swaps were modestly tighter around the globe last week with the exception of Japan and Spain, where swaps widened by 6 and 1 bps, respectively. Despite the sharp increase, Japanese swaps remain 3 bps below their levels from one month ago.

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5. High Yield (YTM) Monitor – High Yield rates rose 8.4 bps last week, ending the week at 5.31% versus 5.22% the prior week.

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 0.8 points last week, ending at 1805.7.

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7. TED Spread Monitor – The TED spread rose 0.7 basis points last week, ending the week at 24.06 bps this week versus last week’s print of 23.41 bps.

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8. Journal of Commerce Commodity Price Index – The JOC index rose 0.2 points, ending the week at 3.46 versus 3.2 the prior week.

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9. Euribor-OIS Spread – The Euribor-OIS spread widened by 1 bps to 14 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 4 bps, ending the week at 57.7 bps versus 61.3 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 fell 0.6% last week, or 21 yuan/ton, to 3563 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 173 bps, 17 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 1.0% upside to TRADE resistance and 2.4% downside to TRADE support.

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Joshua Steiner, CFA