MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF

Takeaway: The high yield carnage continues while commodities catch a momentary reprieve.

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Key Takeaway:

The sole takeaway from last week was the ongoing deterioration in the high yield markets. YTM widened another +37 bps on the week, pushing yields to 9.09%. That brings the M/M change to +115 bps.

Our heatmap below is decidely negative across all durations.


Current Ideas:


MONDAY MORNING RISK MONITOR | HIGH YIELD CONTINUES ITS SELL OFF - RM19

Financial Risk Monitor Summary

• Short-term(WoW): Negative / 2 of 12 improved / 5 out of 12 worsened / 5 of 12 unchanged
• Intermediate-term(WoW): Negative / 3 of 12 improved / 7 out of 12 worsened / 2 of 12 unchanged
• Long-term(WoW): Negative / 1 of 12 improved / 3 out of 12 worsened / 8 of 12 unchanged

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1. U.S. Financial CDS – Swaps were generally tighter among US Financials on the week with the median spread falling from 56 bps to 54.

Tightened the most WoW: COF, MMC, ACE
Widened the most/ tightened the least WoW: ALL, SLM, SLM
Tightened the most WoW: ACE, AIG, MMC
Widened the most/ tightened the least MoM: COF, SLM, SLM

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2. European Financial CDS – Swaps were little changed among European banks last week.

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3. Asian Financial CDS – Swaps mostly widened among Asian banks last week with the Export-Import Bank of China and the State Bank of India leading the way, the former widening by 7 bps to 127, the latter by 7 bps to 166.

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4. Sovereign CDS – Sovereign swaps were flat to wider over last week. Spanish sovereign swaps showed the most movement, widening by 5 bps to 91.

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5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Indonesian swaps tightened the most, by -5 bps to 235.

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6. High Yield (YTM) Monitor – High Yield rates rose 37 bps last week, ending the week at 9.09% versus 8.72% the prior week.

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7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 4 points last week, ending at 1800.

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8. TED Spread Monitor  – The TED spread fell 1 basis point last week, ending the week at 40 bps this week versus last week’s print of 41 bps.

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9. CRB Commodity Price Index – The CRB index rose 2.5%, ending the week at 176 versus 172 the prior week. As compared with the prior month, commodity prices have decreased -3.9%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

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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 11 bps.

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11. Chinese Interbank Rate (Shifon Index) – The Shifon Index rose 12 basis points last week, ending the week at 1.93% versus last week’s print of 1.82%. 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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12. Chinese Steel – Steel prices in China rose 1.6% last week, or 31 yuan/ton, to 1958 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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13. 2-10 Spread – Last week the 2-10 spread tightened to 124 bps, -1 bp tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

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Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT