The three things to keep an eye on include:
1. The TED Spread backed up notably on the week, rising +12 bps to 41 bps.
2. Both High Yield and Leveraged Loans took another leg down last week. High yield (YTM) rose another +15 bps to 8.72% while leveraged loans dropped 11 more points to 1796.
3. The bloodbath that is commodities continued to flow. CRB shed another 3% W/W and is down 6.3% M/M.
Financial Risk Monitor Summary
• Short-term(WoW): Negative / 1 of 12 improved / 2 out of 12 worsened / 9 of 12 unchanged
• Intermediate-term(WoW): Negative / 4 of 12 improved / 7 out of 12 worsened / 1 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 14 out of 27 domestic financial institutions with little movement around the Federal Reserve's rate increase. The median change was only -1 bps. The one callout was MGIC (MTG), where swaps rose +12 bps to 249 bps.
Tightened the most WoW: ACE, AIG, MMC
Widened the most WoW: MTG, COF, AON
Tightened the most WoW: ACE, MMC, LNC
Widened the most MoM: COF, CB, WFC
2. European Financial CDS – Swaps were little changed, on the margin, last week across Europe's bank complex. The median change was zero.
3. Asian Financial CDS – Bank swaps in Asia were mixed last week and unchanged at the median. One standout was India's ICICI Bank, where swaps widened by +14 bps to 178.
4. Sovereign CDS – Sovereign Swaps were mixed last week with a median change of 0 bps. Portuguese swaps showed the most movement, tightening by -5 bps to 168.
5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Turkish and Indonesian swaps tightened the most, by -22 bps to 267 and by -22 bps to 241, respectively.
6. High Yield (YTM) Monitor – High Yield rates rose 15 bps last week, ending the week at 8.72% versus 8.57% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 11 points last week, to end at 1796.
8. TED Spread Monitor – The TED spread rose 12 basis points last week, ending the week at 41 bps this week versus last week’s print of 29 bps.
9. CRB Commodity Price Index – The CRB index fell -3.0%, ending the week at 172 versus 178 the prior week. As compared with the prior month, commodity prices have decreased -6.3%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.
10. 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 10 bps.
11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 3 basis points last week, ending the week at 1.82% versus last week’s print of 1.79%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.
12. Chinese Steel – Steel prices in China rose 0.5% last week, or 10 yuan/ton, to 1927 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.
13. 2-10 Spread – Last week the 2-10 spread was unchanged at 125 bps. We track the 2-10 spread as an indicator of bank margin pressure.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT