The iTraxx Crossover list of mostly junk-rated companies hovered within striking distance of the psychologically important 400 basis point level on Tuesday, as fall-out from the credit squeeze continued to roil European credit default swaps markets.
A slew of negative news – including a shock writedown at Swiss Re the previous day, speculation about further losses at Citigroup and weak US and UK housing data – threatened to drive the cost of protecting corporate debt against default above levels not seen in the current index series and only briefly seen on the previous series during the summer months.
“[The Crossover] is in real danger of touching more than 400bp if we have one more day like the last two or three,” Jim Reid, credit strategist at Deutsche Bank, said in a note.
The iTraxx Crossover, a closely watched measure of risk appetite, opened at about 390bp, according to data from Lehman Brothers, against a close of 392bp on Monday. This means it now costs €390,000 annually to insure €10 million worth of mostly junk-rated corporate debt against default over five years.
“Four hundred basis points is a big psychological barrier,” said Mehernosh Engineer, senior credit strategist at BNP Paribas. “It’s in line with some of the bigger barriers in the equity markets, such as 6,000 on the FTSE, or 1,430 on S&P 500.”
Global credit derivatives indices have hit record highs for the current series in recent days as fears have mounted that losses in the US mortgage market might tip the wider economy into recession. Monday saw the US CDX index of 125 investment-grade names close above 80bp for the first time since the series started on September 20, and on Friday the Crossover hit a series high of 394bp.
“Increased chatter regarding the feared ‘R-word’” was pushing CDS spreads wider, Mr Reid said.
The iTraxx Europe index of 125 investment-grade names opened at about 56bp, according to Lehman Brothers, against a close of 55.6bp on Monday.