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Video | McCullough on Fox: If You're Long the Bond Market, You've Had Much Better Returns

Hedgeye CEO Keith McCullough gives his outlook for the broader market and Russell 2000 on Fox Business' Opening Bell with host Sandra Smith, filling in for Maria Bartiromo.

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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 


Video | McCullough on Fox: European Currencies Look Fantastic Relative to Burning Buck

Hedgeye CEO Keith McCullough shares his outlook for the ECB with host Sandra Smith, filling in for Maria Bartiromo, on Fox Business' Opening Bell.

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Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.33%
  • SHORT SIGNALS 78.51%

Video | McCullough on Fox: If Euro Bounces, Buy Gold

Hedgeye CEO Keith McCullough discusses the state of the gold market on Fox Business' Opening Bell.

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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

 


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