Key Takeaway:
The majority of risk measures eased this week in reaction to Fed Chairwoman Yellen's dovish comments on Tuesday. However, not everything is rosy. Two measures of counterparty risk, the TED spread and CDOR-OIS rose; the TED spread jumped by +6 bps while the CDOR-OIS moved up +1 bp. The TED spread is the difference between LIBOR and short-term treasury rates, and the CDOR-OIS is the difference between the Canadian interbank lending rate and overnight indexed swaps. Both measures isolate the risk that banks perceive in lending to each other; the latter measures that risk specifically in Canada.
Current Ideas:
Financial Risk Monitor Summary
• Short-term(WoW): Positive / 6 of 13 improved / 2 out of 13 worsened / 5 of 13 unchanged
• Intermediate-term(WoW): Positive / 7 of 13 improved / 1 out of 13 worsened / 5 of 13 unchanged
• Long-term(WoW): Negative / 1 of 13 improved / 2 out of 13 worsened / 10 of 13 unchanged
1. U.S. Financial CDS – With Fed Chairwoman Yellen's indication on Tuesday that the U.S. Federal Reserve would need to proceed with caution due to uncertain global risks, swaps tightened for 14 out of 27 domestic financial institutions, and the median spread tightened by -2 bps from 95 to 93.
Tightened the most WoW: PRU, LNC, MET
Widened the most WoW: ACE, MMC, MBI
Tightened the most WoW: AIG, AXP, MS
Widened the most MoM: JPM, MMC, SLM
2. European Financial CDS – Financial swaps mostly tightened in Europe last week, largely in reaction to Janet Yellen's dovish speech on Tuesday.
3. Asian Financial CDS – Financial swaps in Asia shared in the global tightening on expectations for slow changes to interest rates from the Federal Reserve. The median spread in the region tightened week over week by 9 bps to 127. Even in Japan swaps mostly tightened, while a BoJ survey on Friday showed business confidence at its lowest level in three years; this contrast is one more indication of the sway that Federal Reserve policy holds over global markets.
4. Sovereign CDS – DM sovereign swaps mostly tightened over last week. Portuguese swaps tightened the most, by -5 bps to 267.
5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week, led by Brazil which tightened by -31 bps to 364.
6. High Yield (YTM) Monitor – High Yield rates rose 3 bps last week, ending the week at 7.92% versus 7.89% the prior week.
7. Leveraged Loan Index Monitor – The Leveraged Loan Index fell 2.0 points last week, ending at 1850.
8. TED Spread Monitor – The TED spread rose 6 basis points last week, ending the week at 40 bps this week versus last week’s print of 35 bps.
9. CRB Commodity Price Index – The CRB index fell -3.0%, ending the week at 168 versus 173 the prior week. As compared with the prior month, commodity prices have decreased -0.3%. 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 2 basis points last week, ending the week at 2.01% versus last week’s print of 1.99%. 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 2.8% last week, or 67 yuan/ton, to 2486 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.
13. Chinese Non-Performing Loans Chinese non-performing loans amount to 1,274 billion Yuan as of Dec 31, 2015, which is up +51% year-over-year. Given the growing focus on China's debt growth and the potential fallout, we've decided to begin tracking loan quality. Note: this data is only updated quarterly.
14. 2-10 Spread – Last week the 2-10 spread widened to 105 bps, 2 bps wider than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.
15. CDOR-OIS Spread – The CDOR-OIS spread is the Canadian equivalent of the Euribor-OIS spread. It is the difference between the Canadian interbank lending rate and overnight indexed swaps, and it measures bank counterparty risk in Canada. The CDOR-OIS spread widened by 1 bps to 41 bps.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
