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European Banking Monitor: Swaps Continue Tightening Outside of Greece

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

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European Financial CDS - Swaps mostly tightened in Europe last week outside of Greece, where swaps widened notably at two of the three banks we track. Overall, 36 European banks were tighter on the week while just 4 were wider.

 

European Banking Monitor: Swaps Continue Tightening Outside of Greece   - chart 1 euro financial CDS

 

Sovereign CDS – Sovereign swaps were tighter across the board last week except for in the US, where they widened by 1 basis point to 17 bps. Portugal and Italy tightened the most, falling by 21 and 11 bps, respectively. 

 

European Banking Monitor: Swaps Continue Tightening Outside of Greece   - chart 2 sovereign CDS

 

European Banking Monitor: Swaps Continue Tightening Outside of Greece   - chart 3 sovereign CDS

 

European Banking Monitor: Swaps Continue Tightening Outside of Greece   - chart 4 sovereign CDS

 

Euribor-OIS Spread – 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. The Euribor-OIS spread widened by 1 bps to 20 bps.

 

European Banking Monitor: Swaps Continue Tightening Outside of Greece   - chart 5 Euribor OIS Spread

 

 

Matthew Hedrick

Associate

 

Ben Ryan

Analyst 


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MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER

Takeaway: Junk bond rates look set to re-test the Spring 2013 lows. Meanwhile, 2-10 yield spreads continue to drop and take bank stocks with them.

Current Best Ideas:

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 19

 

Key Callouts:

The rise in yield spreads was short-lived as last week we saw the 2-10 spread collapse another 9 bps, bringing the spread down to 210 bps. The pressure on bank stocks is growing as the KRE regional bank ETF is down ~9% vs its early April closing price. Separately, Euribor-OIS continues to widen out, slowly but steadily. Historically, rising Euribor-OIS has coincided with rising stress in the  EU banking system so we're keeping one eye on it even though individual EU bank swaps are signaling ongoing improvement. Finally, high yield rates dropped sharply on the week, coming in by 8.3 bps last week and ending the week at 5.53%. This puts high yield on track to re-test the lows (in yields) seen in May of 2013.

 

 

Financial Risk Monitor Summary

 • Short-term(WoW): Positive / 4 of 12 improved / 1 out of 12 worsened / 7 of 12 unchanged

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

 • Long-term(WoW): Negative / 3 of 12 improved / 4 out of 12 worsened / 5 of 12 unchanged

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 15

 

1. U.S. Financial CDS -  Swaps tightened for 25 out of 27 domestic financial institutions. While the moves were small, -2 bps on average, the direction of the move was broad-based. The only outlier this week was Assured Guaranty (AGO), which rose by a modest 5 bps w/w.

 

Tightened the most WoW: GS, MS, UNM

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

Tightened the most WoW: AXP, MBI, SLM

Widened the most MoM: GNW, WFC, HIG

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 1

 

2. European Financial CDS - Swaps mostly tightened in Europe last week outside of Greece, where swaps widened notably at two of the three banks we track. Overall, 36 European banks were tighter on the week while just 4 were wider.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 2

 

3. Asian Financial CDS - There was material tightening of Chinese bank swaps last week with an average decline of 21 bps. Meanwhile, the tightening in Indian banks continued again last week, tightening a further 7 bps, on average. Japanese financials were nominally wider on the week.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 17

 

4. Sovereign CDS – Sovereign swaps were tighter across the board last week except for in the US, where they widened by 1 basis point to 17 bps. Portugal and Italy tightened the most, falling by 21 and 11 bps, respectively. 

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 18

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 3

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 4

 

5. High Yield (YTM) Monitor – High Yield rates fell 8.3 bps last week, ending the week at 5.44% versus 5.53% the prior week.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 5

 

6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 2.0 points last week, ending at 1,872.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 6

 

7. TED Spread Monitor – The TED spread fell 0.2 basis points last week, ending the week at 19.4 bps this week versus last week’s print of 19.64 bps.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 7

 

8. CRB Commodity Price Index – The CRB index fell -0.8%, ending the week at 305 versus 308 the prior week. As compared with the prior month, commodity prices have decreased -0.5% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 8

 

9. Euribor-OIS Spread – 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. The Euribor-OIS spread widened by 1 bps to 20 bps.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 9

 

10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 2 basis points last week, ending the week at 2.51% versus last week’s print of 2.53%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 10

 

11. Chinese Steel – Steel prices in China rose 0.4% last week, or 12 yuan/ton, to 3,233 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 12

 

12. 2-10 Spread – Last week the 2-10 spread tightened to 210 bps, -9 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 13

 

13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.5% upside to TRADE resistance and 1.2% downside to TRADE support.

 

MONDAY MORNING RISK MONITOR: HIGH YIELD & YIELD SPREADS COMPRESS FURTHER - 14

 

Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT

 


Fund Flows, Refreshed

Takeaway: It was another week of decent fixed income subscriptions at the expense of equities with stock fund flow lackluster.

Editor's Note: This research note was originally sent to subscribers on May 29, 2014 by Hedgeye’s Financials analyst Jonathan Casteleyn. Follow Jonathan on Twitter @HedgeyeJC.  

 

Fund Flows, Refreshed - wall street  

 

ICI Mutual Fund Data and ETF Money Flow

In the most recent 5 day period, the combination of taxable and tax-free bond funds had a decent week of production with $2.3 billion in inflow, slightly above the running year-to-date average of $2.1 billion. Conversely, equity funds mustered just a $678 million inflow, well below the year-to-date average of a $3.0 billion inflow. In our charts of weekly fund production herein, the 12 week linear charts depict the intermediate term trends of these fund flows displaying the more positive backdrop for fixed income versus the ongoing decline in interest in equities.

 

Total equity mutual fund flows put up only a slight inflow in the most recent 5 day period ending on May 21st with just $678 million coming into the all stock category as reported by the Investment Company Institute. The composition of the slight inflow was again made up of a moderate outflow of $1.8 billion within domestic stock funds which was offset by the $2.4 billion inflow into international products. Both equity categories ran below their respective 2014 weekly averages with the combined weekly mean for all equity products settling in at $3.0 billion inflow, now in-line with the $3.0 billion weekly average inflow from 2013. 

 

Conversely, fixed income mutual fund flows continued on much strong footing for the week ending May 21st, with a solid $2.3 billion flowing into all fixed income funds. While this production was a deceleration from the $3.9 billion that came into bond products the week prior, the inflow into taxable products was the 15th consecutive week of positive flow and the inflow into municipal or tax-free products was the 19th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $2.1 billion weekly inflow, a vast improvement from 2013's weekly average outflow of $1.5 billion, but still a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow). 

 

ETFs followed in suite with mutual fund flows during the week with weak production in the equity ETF category offset by a substantial inflow into bond exchange traded funds. Equity ETFs experienced a sizeable $7.0 billion outflow, while fixed income ETFs put up a $5.4 billion subscription. The 2014 weekly averages are now a $476 million weekly inflow for equity ETFs and a $1.2 billion weekly inflow for fixed income ETFs. 

 

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $14.1 billion spread for the week ($6.3 billion of total equity outflow versus the $7.7 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.0 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   

 

Fund Flows, Refreshed - ICI chart 1

 

Most Recent 12 Week Flow in Millions by Mutual Fund Product

 

Fund Flows, Refreshed - ICI chart 2

 

Fund Flows, Refreshed - ICI chart 3

 

Fund Flows, Refreshed - ICI chart 4

 

Fund Flows, Refreshed - ICI chart 5

 

Fund Flows, Refreshed - ICI chart 6

 

Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds

 

Fund Flows, Refreshed - ICI chart 7

 

Fund Flows, Refreshed - ICI chart 8

 

Net Results

The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a negative $14.1 billion spread for the week ($6.3 billion of total equity outflow versus the $7.7 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $7.0 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 

 

Fund Flows, Refreshed - ICI chart 9  

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