European credit markets continued their slide Tuesday, as credit default swap indexes headed out towards the record wides last seen in the days after the collapse of Lehman Brothers.
Poor macro numbers and corporate earnings have begun to provide tangible evidence that companies are only now feeling the real effects of the crunch. And fears still persist of further dramatic unwinds and forced selling by funds and structured vehicles which could drive spreads on indexes higher.
The European Markit iTraxx main index of investment grade borrowers’ CDS was quoted at 162.44bp versus a closing level of 158.25bp Monday, meaning it now costs €162,440 per year to protect a €10 million basket of European investment-grade bonds.
The iTraxx crossover index of mostly junk rated borrowers’ CDS was quoted at the dizzy heights of 880bp having closed at 863bp Monday. And the HiVol index of the most volatile investment grade borrowers’ CDS spreads (sectors exposed to the economy such as retail dominate it) was quoted at 354bp versus 341.5bp.
Indexes tracking structured bonds too, continued a negative trend. The ABX index was implying prices of as little as 30 cents on the dollar for triple-A rated mortgage-backed securities.
Jim Reid at Deutsche Bank explains:
One of the consequences of the revised TARP plans continues to be further stress in the ABX world with PAAA/AAAs down another 2-4 points overnight. Generally these securities are somewhere between 5-12 points lower than where they were before Paulson moved the goalposts. We’ve also seen stress escalate in CMBS with AAAs widening 150bp to over +400bp in little more than a week. Meanwhile in the corporate world LevX S3 traded at around its lows again (80 at the lows) yesterday. None of this is good news for the financial sector as it tries to stabilise its asset base. The US financial index hit fresh 12 year plus lows overnight on the back of this negative sentiment.
Reid foresees more writedowns coming at the banks as a consequence:
If you look at the WDCI page on Bloomberg you’ll see that US financials are getting ever closer to our “Trillion Dollar Mean Reversion” figure as writedowns now stand at $664bn in the US and $966bn worldwide. Given the asset price moves discussed above, this isn’t the end of the writedowns.
And CDS on sovereign bonds continue to come under pressure. Markit’s daily wrap says it all:
Sovereign Credit Improvement:
No sovereign improvement.
As for those suffering credit deterioration – take your pick.
Russia saw the greatest move, with its CDS 68bp wider at 812bp.
The UK’s CDS is 3bp wider at 68bp.