European credit derivatives continued to rally on Friday amid rising confidence as the US stress test results failed to upset the markets.
Markit’s iTraxx Europe index, made up of 125 investment grade names, narrowed to 121 basis points – 10bp tighter than Thursday’s close and more than 20bp lower on the week.
Markit’s iTraxx Crossover index, made up of 50 mostly high-yield names, narrowed to 718bp – a 12bp fall from Thursday’s close. It has tightened about 100bp this week.
The credit rally was originally propelled by the surge in equities, although the tightening of spreads on investment grade and high yield corporates and financials is now helping to boost shares.
Flows were relatively light, however, as many traders sat on the sidelines ahead of the US payrolls number this afternoon, which has the potential to scupper growing confidence across asset classes.
Significantly, the credit markets have outperformed the equity markets since the start of April, which suggests the rally in shares prices may prove to be longer lasting than previous surges higher.
The iTraxx Crossover has rallied 25 per cent since April 1, when it closed at 962bp, compared with a rally of about 15 per cent on the FTSE Eurofirst 300 over the same period. Although this is a crude measure, it provides a simple comparison between the two markets.