MONDAY MORNING RISK MONITOR: RISK IS RISING

Takeaway: High yield rates are blowing out, while domestic and EU bank swaps are doing the same.

Current Best Ideas:

 

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Key Callouts:

* High Yield (YTM) Monitor – High Yield rates rose 36.3 bps last week, ending the week at 6.23% versus 5.86% the prior week. 

 

* European Financial CDS - Swaps widened sharply across the European bank complex last week. Spanish and German banks were among the most changed. Sberbank of Russia rose 40 bps to 380 bps and is now up 71 bps m/m.  

 

* U.S. Financial CDS -  Swaps widened for 27 out of 27 domestic financial institutions. The large cap global US Banks were wider by an average of 10 bps on the week, while the specialty finance names widened an average of 25 bps.

 

 

Financial Risk Monitor Summary

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

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

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

 

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1. U.S. Financial CDS -  Swaps widened for 27 out of 27 domestic financial institutions. The large cap global US Banks were wider by an average of 10 bps on the week, while the specialty finance names widened an average of 25 bps.

 

Widened the least WoW: AON, CB, UNM

Widened the most WoW: AXP, ALL, AIG

Widened the least/ tightened the most WoW: MMC, ACE, AON

Widened the most MoM: AGO, RDN, MBI

 

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2. European Financial CDS - Swaps widened sharply across the European bank complex last week. Spanish and German banks were among the most changed. Sberbank of Russia rose 40 bps to 380 bps and is now up 71 bps m/m. 

 

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3. Asian Financial CDS - Chinese bank swaps widened sharply on the week, alongside a notable rise in Indian bank swaps. Japan's banks were little changed, aside from Daiwa, where they rose 15 bps. 

 

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4. Sovereign CDS – Sovereign swaps widened across the board last week. Italian sovereign swaps widened by 21.6% (+19 bps to 107). Japanese swaps rose 6 bps to 39 bps (+19%).

 

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5. High Yield (YTM) Monitor – High Yield rates rose 36.3 bps last week, ending the week at 6.23% versus 5.86% the prior week.

 

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6. Leveraged Loan Index Monitor – The Leveraged Loan Index rose 9.0 points last week, ending at 1868.

 

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7. TED Spread Monitor – The TED spread rose 0.1 basis points last week, ending the week at 22.1 bps this week versus last week’s print of 22.01 bps.

 

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8. CRB Commodity Price Index – The CRB index fell -1.3%, ending the week at 280 versus 284 the prior week. As compared with the prior month, commodity prices have decreased -3.8%. 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 was unchanged last week at 13 bps.

 

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10. Chinese Interbank Rate (Shifon Index) –  The Shifon Index fell 16 basis points last week, ending the week at 2.677% versus last week’s print of 2.84%. 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 fell 3.0% last week, or 89 yuan/ton, to 2910 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 195 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 1.0% upside to TRADE resistance and 0.3% downside to TRADE support.

 

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Joshua Steiner, CFA

 

Jonathan Casteleyn, CFA, CMT