Current Best Ideas:
The XLF put in a good showing last week, rising 2.4%, but that brings the month-over-month change to just +0.4%. Not much to get excited about. Much of the geopolitical risk that was pushing risk premia out last month is now in retreat. This is evident across the EU, Sovereign and US Financials CDS complex as well as in the move in high yield (tighter by 8 bps on the week).
On an intermediate term basis, there are now 5 measures that are positive while 4 are negative. One of the few areas that continues to retreat aggressively is the 2-10 spread, now tracking 10 bps tighter on the week at 191 bps.
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 4 of 12 improved / 0 out of 12 worsened / 8 of 12 unchanged
• Intermediate-term(WoW): Positive / 5 of 12 improved / 4 out of 12 worsened / 3 of 12 unchanged
• Long-term(WoW): Negative / 1 of 12 improved / 3 out of 12 worsened / 8 of 12 unchanged
1. U.S. Financial CDS - Swaps tightened for 25 out of 27 domestic financial institutions. Led by WFC (-6 bps) the large cap financials were tighter by an average of 4 bps. Specialty finance also saw big swings with Sallie Mae tightening by 20 bps on the week to 228 bps.
Tightened the most WoW: TRV, CB, ACE
Widened the most/ tightened the least WoW: AXP, GNW, GS
Tightened the most WoW: RDN, AGO, WFC
Widened the most MoM: GNW, AXP, MET
2. European Financial CDS - Swaps mostly tightened in Europe last week, dropping by an average of 6 bps on the week. Swaps are now tighter by 5 bps on a m/m basis. Even Sberbank, a proxy for the geopolitical turmoil of the Russia/Ukraine situation, tightened by 11 bps on the week, but remains over 300 bps at 316 bps.
3. Asian Financial CDS - Default swaps across the Asian financials complex were generally tighter with the most improvement coming from India, where they tightened by an average of 8 bps.
4. Sovereign CDS – Sovereign swaps tightened around the world last week, except in the US, where they widened by 1 bp to 18 bps. Portuguese sovereign swaps tightened by -10.9% (-20 bps to 161 bps).
5. High Yield (YTM) Monitor – High Yield rates fell 8.3 bps last week, ending the week at 5.61% versus 5.69% the prior week.
6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 6.0 points last week, ending at 1878.
7. TED Spread Monitor – The TED spread rose 1.1 basis points last week, ending the week at 21.5 bps this week versus last week’s print of 20.41 bps.
8. CRB Commodity Price Index – The CRB index fell -0.9%, ending the week at 289 versus 291 the prior week. As compared with the prior month, commodity prices have decreased -3.2% We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
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 was unchanged at 15 bps.
10. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 4 basis points last week, ending the week at 2.85% versus last week’s print of 2.89%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
11. Chinese Steel – Steel prices in China fell 0.8% last week, or 26 yuan/ton, to 3092 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity, and, by extension, the health of the Chinese economy.
12. 2-10 Spread – Last week the 2-10 spread tightened to 191 bps, -2 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT