MONDAY MORNING RISK MONITOR: STILL GOING THE WRONG WAY

Takeaway: Credit risk continues to rise globally with Indian banks the latest group to keep tabs on. High Yield, meanwhile, continues to deteriorate.

Key Takeaways:

Overall, risk measures continue to indicate broad-based deterioration. Swaps at the global sovereign and global banking level continue to go the wrong way. Interestingly, systemic banking system gauges like TED Spread and Euribor-OIS, remain benign. High Yield continues to get hit. The weakest links always get clipped first, so keep an eye on HY.

 

* Asian Financial CDS - It's not often that we flag Asia, but it's worth noting the huge move in Indian bank swaps. ICICI bank blew out 42 bps, or +18%, while State Bank of India was wider by 23 bps (+11%) and IDB Bank of India widened by 33 bps (+14%). These are significant outliers vs. the rest of Asia.

 

* Markit MCDX Index  – Muni swaps continued to widen. Last week spreads widened a further 8.9 bps, ending the week at 84.4 bps versus 75.5 bps the prior week. 

 

* High Yield (YTM) – High Yield rates are currently our primary gauge of risk in the sector. They rose a further 11.4 bps last week, ending the week at 6.23% versus 6.11% the prior week.

 

* U.S. Financial CDS -  U.S. Financials were wider across the board last week, with the sole exception of Sallie Mae, which tightened by 21 bps (AGO gets an honorable mention as it was flat). The big movers were GS and MS, widening by 13 bps and 11 bps, respectively. 

 

* XLF Macro Quantitative Setup – Short-term upside currently 2x downside. Our Macro team’s quantitative setup in the XLF shows 2.8% upside to TRADE resistance and 1.4% downside to TRADE support.

 

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 3 of 13 improved / 5 out of 13 worsened / 5 of 13 unchanged

 • Intermediate-term(WoW): Negative / 5 of 13 improved / 6 out of 13 worsened / 2 of 13 unchanged

 • Long-term(WoW): Positive / 5 of 13 improved / 1 out of 13 worsened / 7 of 13 unchanged

 

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1. U.S. Financial CDS -  U.S. Financials were wider across the board last week, with the sole exception of Sallie Mae, which tightened by 21 bps (AGO gets an honorable mention as it was flat). The big movers were GS and MS, widening by 13 bps and 11 bps, respectively. BAC and C weren't far behind, widening by 8 bps each. For reference, Wells Fargo continues to be perceived as safest with a modest 1 bp widening, followed by JPM at +4 bps. Overall, swaps widened for 25 out of 27 domestic financial institutions.

 

Widened the least/ tightened the most WoW: SLM, AGO, AON

Widened the most WoW: GS, RDN, C

Widened the least WoW: WFC, AON, JPM

Widened the most MoM: AXP, TRV, ALL

 

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2. European Financial CDS - Financials swaps across Europe were mostly wider last week, consistent with the month-over-month trend.

 

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3. Asian Financial CDS - Indian banks posted significant widening. ICICI bank blew out 42 bps, or +18%, while State Bank of India was wider by 23 bps (+11%) and IDB Bank of India widened by 33 bps (+14%). In Japan and China, financials swaps were flat to modestly wider.

 

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4. Sovereign CDS – Sovereign swaps blew out in Portugal (+27 bps), but were only nominally wider elsewhere, and tightened again in the U.S. 

 

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5. High Yield (YTM) Monitor – High Yield rates rose a further 11.4 bps last week, ending the week at 6.23% versus 6.11% the prior week.

 

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index was flat last week at 1793.21.

 

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7. TED Spread Monitor – The TED spread fell 0.2 basis points last week, ending the week at 22.975 bps this week versus last week’s print of 23.215 bps.

 

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8. Journal of Commerce Commodity Price Index – The JOC index fell -2.6 points, ending the week at 0.32 versus 2.9 the prior week.

 

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9. Euribor-OIS Spread – The Euribor-OIS spread widened by 1 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 – Liquidity deposits declined by 18 billion Euros last week. 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 8.9 bps, ending the week at 84.4 bps versus 75.5 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 1.4% last week, or 47 yuan/ton, to 3375 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 186 bps, 1 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 2.8% upside to TRADE resistance and 1.4% downside to TRADE support.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT


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