The European credit markets widened today as the worsening Greece situation wore down the resilience shown in recent days. Greece’s spreads soared through the 400bp barrier and hit 415bp today, its widest level since the beginning of February. The sovereign is now trading wider than Iceland for the first time on record.
An IMF delegation arrived in Athens today, and a rescue package now appears inevitable given the currents yields on GGBs. But the reports emerging over recent days have unnerved the markets, with eurozone members seemingly at loggerheads over the rate they will lend to Greece. There are also suggestions – denied by the Greek government – that it is reluctant to accept IMF conditionality, fearing social unrest. Unless there is some reassurance from EU leaders then we could see the 425bp record wide levels reached in February tested in the coming days.
Credit underperformed equity today, with the Markit iTraxx Europe index widening 3bp to 79.5bp. The Markit iTraxx Crossover was 10bp wider at 428.5bp, while the Markit iTraxx HiVol was at 119bp, just over 3bp wider on the day. The deteriorating sovereign market had little effect on corporate spreads yesterday, but today the negative sentiment has spilled over and pushed spreads wider.
The Markit SovX Western Europe index is now trading at 93bp, 17bp wider from where it opened last week. The chart below shows the recent underperformance of sovereign credit relative to corporate. Greece’s travails haven’t had nearly the same effect on the broader markets as the last bout of nerves in February.
The macroeconomic front remains supportive to spreads and stocks. Solid survey data on the services sector provided further evidence that the European economy is recovering. The Markit Eurozone Services PMI rose to 54.1 in March, indicating the fastest rate of expansion since November 2007. The equivalent PMI for the UK was not quite as impressive but still indicated a sector in recovery.
In North America the credits markets also lost ground, with the Markit CDX IG index widening over 2bp to 86.5bp.
Markit’s Gavan Nolan wrote this CDS report