European credit derivative markets saw the optimism of the past couple of days knocked down by talk that Merrill Lynch would announce a further $2.5bn of write downs from credit losses on Wednesday - adding to the $5bn hit already “pre-announced.”
The full news, first rumoured in the New York Times, turned out to be worse than the talk, with Merrill reporting $7.9bn of write downs for the third quarter on leveraged loans to private equity buyouts and bad bets on mortgage backed bonds. The write downs pushed the banking group into a loss for the quarter.
The cost of protecting European corporate debt against default had already risen sharply on the rumours on Wednesday morning and so was little changed after the numbers, traders said.
The iTraxx Crossover index of mostly junk-rated names, which acts as a barometer for investor appetite for riskier credit, was about 14 basis points wider at roughly 329.5bp, following a near 21bp move in the opposite direction on Tuesday.
Wednesday’s move means it now costs €329,500 annually to insure €10m of Crossover debt against default over five years.
The iTraxx main Europe index of investment grade companies was also wider, by about 2bp to 38.25bp, again almost retracing entirely Tuesday’s tightening.
Among single companies, Fiat saw a decline in its cost of protection by about 3bp to 59.5bp after it reported strong third-quarter profits and raised its forecasts for the year.
Glencore, the Switzerland-based commodities trading group, was also a touch wider on news that it filed an interest in bidding for units of Russneft, a Russian oil company.
