Merrill Lynch on Credit Markets

April 15th, 2014 7:45 pm | by John Jansen |

Via Merrill Lynch Research:

 

  • Geopolitical risks weigh on credit. As our economists discuss in more details below, the Ukraine/Russia tensions intensified today. CDX IG widened about 2.5bps following the news headlines around 10 a.m., before trading tighter in the second half of the day and closing about 1bps wider relative to Monday. Stocks, on the other hand, completely recovered from the initial sell-off and ended the day up 0.7% on the S&P 500, led by Utilities (+1.33%) and Energy (+1.25%). We thinkthis performance divergence today highlights high grade credit’s higher sensitivity to systemic risks and is helping close the recent performance gap between credit relative to equities (see Credit Market Strategist: Growth belongs to stocks 11 April 2014). Treasury valuations reacted more in line with credit, with 10-year Treasury yield falling 2bps today. Being closer to the conflict geographically, Europe underperformed, with Western European stocks down 2.5% and iTraxx Main 2bps wider today. Russian stocks closed 2.5% lower while Russian Ruble depreciated. – Yuriy Shchuchinov (Page 4)
  • Russia and Ukraine Economic Watch: Worst case getting closer. Military operation in place. Ukrainian authorities have started a military operation against pro-Russian insurgents in Eastern Ukraine earlier today. Armed forces have apparently re-captured an airfield and blockaded several cities held by the protesters. An increasing number of casualties has already been reported from both sides. – Vladimir Osakovskiy, Vadim Khramov (Page 10)
  • Significant decline in CDX IG longs. Non-dealer investor’s net long-risk positioning in CDX IG declined significantly last week (as of April 11th) to $17.7bn from $26.6bn in the prior week, corresponding to a 28% decline, according to DTCC data. Thus, the net positioning in CDX IG is now $20.9bn lower than the peak of $38.5bn recorded on November 1st. The net long positioning for CDX HY declined modestly to $4.1bn last week from $4.2bn in the prior week. Assuming that the CDX HY is around four times more volatile than CDX IG in terms of returns, the $4.1bn net long in HY corresponds to about $16.4bn CDX IG net long in terms of risk, which is roughly on par with the current $17.7bn reading for CDX IG. This convergence between CDX IG and CDX HY longs has not been as pronounced as this since September last year, which is clearly illustrated in the chart below. – Jon Lieberkind (Page 6)
  • Foreigners increased their net selling of corporates in February. Foreign investors sold a net $8.7bn of corporate bonds (excluding ABS) in February. This translates into an 84% increase in outflow from the -$4.7bn recorded in January, according to TIC data. Overall foreigners were net buyers of $84.8bn in US long-term securities in February, representing a reversal from the $14.8bn of net selling in January. The reversal from net selling to net buying can predominantly be attributed to a significant increase in Treasury purchases that amounted to $92.5bn in February vs. -$0.6bn in January. Moreover, net purchases of non-Agency MBS turned positive and amounted to $0.09bn in February from -$1.8bn in January. Meanwhile, foreign investors were net selling $0.08bn in US Agencies, $6.9bn in Agency bonds, $0.9bn in US Corporate Stocks. Furthermore, foreigners were net sellers of $2.1bn in Agency MBS. –
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