The cost of protecting European corporate debt against default fell on Tuesday after Citigroup’s earnings results came in better than the market had feared.
The bank posted its first quarterly loss since its creation in 1998, with a $18.1 billion writedown from exposure to subprime mortgages and other risky debt. This was significantly better than the speculated $24bn loss.
The iTraxx Crossover, a closely watched measure of risk appetite, tightened by about 6 basis points to about 400bp in morning trade, meaning it now costs €400,000 annually to insure €10 million worth of mostly junk-rated corporate debt against default over five years.
Citigroup’s results removed some of the uncertainty hanging over credit markets about the extent of further writedowns to hit bank’s balance sheets. However, these worries are being replaced by fears that a US recession will bring a sharp rise in default rates across the corporate spectrum.
“In the next few weeks, investor concern will probably move from subprime-related losses to the damage caused to the financial sector by the slowdown of the US economy. Banks could start facing increasing delinquencies and defaults on other credit classes, as the economy slows and job losses rise,” analysts at BNP Paribas said in a note.
A key measure of US consumer sentiment is due to be released later today at 13:30 GMT. Analysts said the credit market was bracing itself for poor December US retail sales figures. As BNP Paribas warn: “A decrease in consumer consumption, which accounts for about two-thirds of the US economy, will be another sign of increased likelihood of a recession.”
The iTraxx Europe index of 125 investment-grade names tightened to about 65.5bp, against a close of 67.5bp on Monday.