The cost of protecting European corporate debt against default edged slightly lower on Monday, ending a bearish run which saw prices swell significantly last week.
The iTraxx Crossover index of mostly junk-rated corporate debt swung wider still as the market opened, before retracing its steps to sit one basis point tighter than Friday’s close at 383bp.
This means it now costs €1,000 less than it did on Friday to protect €10m worth of Crossover debt against default over five years.
But the tightening is a brief period of consolidation, analysts said, stressing that the prevailing mood in credit markets remains grim.
“Credit market participants seem more pessimistic about 2008 than other investors,” said Ben Bennett, a credit strategist at Lehman Brothers. “Spreads almost widened out too much last week, we got ahead of equities, then on Friday they caught up.”
The spectre of a recession in the US loomed closer last week after below-forecast manufacturing and employment numbers spooked investors and sparked a sell-off in equities on Friday. The Crossover has widened around 50bp since Christmas, though trade in credit default swaps has been thin and tentative.
“Today and the next couple of days we’re going to try and find a proper level, now all the market participants are back in after the break,” Bennett said.
Rajeev Shah at BNP Paribas said he expects the Crossover to surpass 400bp in the short-term, and the iTraxx Europe index of investment grade corporate debt to strike 70bp.
This index was at 61bp on Monday, unchanged from Friday’s close.