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    MARKET EDGES

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Takeaway: Domestic indicators reflect growing risk aversion. High yield is blowing out while cash seeks safety (Treasuries).

Current Best Ideas:

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Key Callouts:

In spite of the mounting tensions abroad, the risk parameters that are showing the most strain are domestic. For instance, high yield rates soared last week, rising 27 bps. Meanwhile, the 2-10 yield spread continues to compress, shaving another 6 bps to end the week at 200 bps. The only relief comes from falling commodity prices as the CRB was down 1.3% last week and is now down 4.6% on the month. Meanwhile, internationally, Sberbank widened by 35 bps to 265 bps as the condemnation of Russia grows.

* High Yield – High Yield rates rose 27.3 bps last week, ending the week at 5.70% versus 5.43% the prior week.

* 2-10 Spread – Last week the 2-10 spread tightened to 200 bps, -6 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

* CRB Commodity Price Index – The CRB index fell -1.3%, ending the week at 297 versus 301 the prior week. As compared with the prior month, commodity prices have decreased -4.6% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

Financial Risk Monitor Summary

 • Short-term(WoW): Negative / 1 of 12 improved / 3 out of 12 worsened / 8 of 12 unchanged

 • Intermediate-term(WoW): Negative / 2 of 12 improved / 7 out of 12 worsened / 3 of 12 unchanged

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

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1. U.S. Financial CDS -  Swaps were fairly uneventful in the US with a median change of 0 bps. Large banks tightened by an average 4 bps as concerns around EU contagion receded while bank earnings came in modestly better than expected. Overall, swaps widened for 14 out of 27 domestic financial institutions.

Tightened the most WoW: AGO, MBI, MS

Widened the most WoW: ALL, ACE, AON

Widened the least/ tightened the most WoW: TRV, CB, SLM

Widened the most MoM: MBI, AGO, WFC

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2. European Financial CDS - Swaps across Europe were narrowly changed with one exception: Russia's Sberbank, which widened +35 bps to 265 bps. 

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3. Asian Financial CDS - Bank swaps across Asia were modestly higher last week, rising by an average 3 bps. India saw a slightly larger increase at +8 bps.

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4. Sovereign CDS – Sovereign swaps were little changed last week as the largest move came from Italy at +3 bps, while the average move was 0 bps. 

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5. High Yield (YTM) Monitor – High Yield rates rose 27.3 bps last week, ending the week at 5.70% versus 5.43% the prior week.

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 1 point last week, ending at 1883.

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7. TED Spread Monitor – The TED spread rose 0.3 basis points last week, ending the week at 21.9 bps this week versus last week’s print of 21.56 bps.

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8. CRB Commodity Price Index – The CRB index fell -1.3%, ending the week at 297 versus 301 the prior week. As compared with the prior month, commodity prices have decreased -4.6% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

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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 tightened by 1 bps to 13 bps.

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10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 4 basis points last week, ending the week at 3.25% versus last week’s print of 3.29%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

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11. Chinese Steel – Steel prices in China rose 0.4% last week, or 12 yuan/ton, to 3144 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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12. 2-10 Spread – Last week the 2-10 spread tightened to 200 bps, -6 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

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13. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.6% upside to TRADE resistance and 0.5% downside to TRADE support.

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Joshua Steiner, CFA

Jonathan Casteleyn, CFA, CMT