European credit derivatives markets weakened on Tuesday morning amid concerns that mounting problems in the commercial paper market would force investors to sell assets.
Investors have been refusing to buy asset backed commercial paper (ABCP), or short-term commercial paper backed by home loans, a shift which has seen various financial players – most recently Sachsen LB – unable to meet their funding committments.
Strategists at BNP warned that “the liquidity crunch is far from being solved and uncertainty and lack of transparency is hurting market sentiment,” adding:
The commercial paper market take up remains very poor particularly for ABCP. According to Dealogic, $41bn of European CP were due to mature yesterday, but they had been replaced by only $15bn of new notes. Within ABCP, $22.6bn matured and only $4.6bn were refinanced, implying a ratio of 20 per cent. In normal market conditions the two figures should be roughly the same. The danger is that this could cause further forced sellers.
The investment-grade iTraxx Europe index rose about 3bp to 51bp by mid-morning, while the benchmark iTraxx Crossover index of mostly high-yield debt widened to 349bp after trading as low as 332bp.
“Something is not quite right in the financial system which makes us nervous,” Jim Reid, head of fundamental credit research at Deutsche Bank, said in a note. “With commercial paper problems still existing and Treasury bills trading so strangely there will be a better time to add risk in credit than today.”
Meanwhile, emerging market spreads – one of the best performing asset classes until July – have spiralled upwards in recent weeks, with Argentina and Venezuela bearing the brunt of the widening, according to Markit’s Gavan Nolan.
Both countries, although reasonably robust from a pure credit perspective, have worrying political regimes, and have shown recent signs of deterioration. In Argentina, President Neston Kirchner is preparing to effectively hand over control to his wife, while Venezuela’s President Hugo Chavez continues to undermine the country’s democratic institutions.
Over the past 28 days, five-year credit default swaps on Argentine debt have widened 257bp to 539bp, while Venezuela added 240bp to 509bp.