The cost of protecting Marks and Spencer’s debt against default jumped to its highest level since 2005 on Wednesday after the retailer reported a drop in sales, stoking fears of a consumer slowdown and recession in the UK.
The cost of the UK retailer’s 5-year credit default swaps hit 105 basis points according to Deutsche Bank prices, meaning it now costs €105,000 annually to protect €10m worth of Marks and Spencer debt against default over five years, €15,000 more than it did on Tuesday.
Marks and Spencer shares sank 17 per cent on the FTSE 100, and sparked a widening of credit default swaps for other UK retailers including Next, Tesco and J Sainsbury.
The bad news for UK retail came on the back of grim US headlines on Tuesday, where telecoms company AT&T said economic slowdown was forcing it to disconnect customers. Mortgage lender Countrywide Financial was forced to deny rumours it was on the brink of bankruptcy after its shares fell 28 per cent.
“All the headlines are adding up now. Everyone is focusing on recession risks and what that means for credit,” said Ben Bennett, credit strategist at Lehman Brothers.
The iTraxx Crossover index of mostly junk-rated European corporate debt broke through the psychologically important 400 basis point level to hit 403bp on Wednesday, a series high.
A closely-watched measure of risk-appetite, the Crossover last broke through 400bp in late November, driven by the market’s fears of subprime losses.
Highs were hit across the Atlantic too. The CDX index of investment-grade US corporate debt closed at its highest ever level on Tuesday at 96.5bp.