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Takeaway: The risk monitor remains negative on a short term basis. We continue to watch high yield for signs of inflection.

Key Takeaways:

* 2-10 Spread – Last week the 2-10 spread widened to 188 bps, 19 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

* High Yield (YTM)  – High Yield rates rose 28.2 bps last week, ending the week at 5.75% versus 5.47% the prior week.

* Sovereign CDS – The U.S. and Germany tightened notably WoW, while the rest of the world deteriorated. U.S. swaps came in by 4 bps to 26 bps, while Japanese swaps widened by 6 bps to 78 bps. 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 1 of 13 improved / 8 out of 13 worsened / 4 of 13 unchanged

 • Intermediate-term(WoW): Positive / 4 of 13 improved / 3 out of 13 worsened / 6 of 13 unchanged

 • Long-term(WoW): Positive / 4 of 13 improved / 2 out of 13 worsened / 7 of 13 unchanged

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1. American Financial CDS -  Morgan Stanley was the outlier this week, with its swaps tightening by 2 bps. Everywhere else in the U.S., swaps widened. Noteworthy increases in mortgage insurers this week follow two weeks of no improvement. Sallie Mae saw swaps blow out 62 bps on plans to split the company.

Tightened the most WoW: TRV, MS, UNM

Widened the most WoW: SLM, MBI, AIG

Tightened the most WoW: MBI, AGO, MMC

Widened the most MoM: SLM, MET, ACE

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2. European Financial CDS - The median EU bank widened by 7 bps week-over-week. French, Italian and Spanish banks saw the most significant deterioration. Sberbank of Russia showed the largest WoW % change in swaps (+10.8%), rising 20 bps to 206 bps. This is consistent with the ongoing drop in the commodities complex. 

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3. Asian Financial CDS - Almost universally wider across the board. Chinese banks all widened by 10-11 bps. Japanese financials were all wider. Indian banks were mixed.

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4. Sovereign CDS – The U.S. and Germany tightened notably WoW, while the rest of the world deteriorated. U.S. swaps came in by 4 bps to 26 bps, while Japanese swaps widened by 6 bps to 78 bps. 

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5. High Yield (YTM) Monitor – High Yield rates rose 28.2 bps last week, ending the week at 5.75% versus 5.47% the prior week.

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index fell -5.2 points last week, ending at 1799.41.

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7. TED Spread Monitor – The TED spread rose 1.3 basis points last week, ending the week at 24.725 bps this week versus last week’s print of 23.475 bps.

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8. Journal of Commerce Commodity Price Index – The JOC index fell -1.4 points, ending the week at 3.16 versus 4.5 the prior week.

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9. Euribor-OIS Spread – The Euribor-OIS spread was flat at 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. 

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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 widened 4.7 bps, ending the week at 66.3 bps versus 61.7 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 1.9% last week, or 67 yuan/ton, to 3469 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 188 bps, 19 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 2.2% upside to TRADE resistance and 1.1% downside to TRADE support.

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Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT