People in the credit markets are prepared for more pain. They fully expect this to get worse before it gets better, and they question whether what central banks have done to date will be enough. – David Brickman, Lehman Brothers’ director of European credit strategy
The cost of insuring European corporate debt against default rose on Friday, as fears mounted about the health of global credit and money markets.
The widely-watched iTraxx Crossover index, a key barometer of European risk sentiment, widened 8bp to 340bp. In other words, the annual cost of insuring a €10m portfolio of European corporate debt against default over five years added €8,000 to €340,000.
Persistent weakness in financial names saw the iTraxx Europe index and the iTraxx Senior Financial sub-index trade both trade at 50bp on Friday, according to Deutsche Bank data. It is the first time the indices have traded at the same level.
The iTraxx Europe, of which the iTraxx Senior Financial is a sub-index, consists of 125 investment-grade corporate borrowers and is heavily weighted towards non-financials. Historically, credit default swaps on banks have traded at much tighter levels than on their corporate peers but the ongoing credit squeeze and the worsening subprime crisis have pushed financial spreads sharply wider.
Dresdner Kleinwort expects this move to continue, since “pending uncertainties about the true impact of the market turmoil on banks’ credit strength will drive spreads likely wider before we see a tightening.”