The Fed’s 75 basis point emergency rate cut failed to shake credit markets from their gloom on Tuesday, as a brief rally soon faded away.
The iTraxx Crossover of mostly junk-rated debt, a closely watched measure of risk appetite, tightened 20 basis points on the news before springing back out.
By 2pm the index had swung back to 507 basis points according to Lehman Brothers prices — 21 basis points wider than at Monday’s close.
“The initial reaction was to sell into strength, not to buy. That tells you a lot about sentiment right now,” said David Brickman at Lehman Brothers.
The market had already been pricing in a rate cut, analysts said.
“The market didn’t need confirmation that this is a recession. The only thing it is getting used to is that even the Bernanke Fed can make emergency cuts,” said Daniela Sozzi at BNP Paribas.
Eyes are now turning to the European Central Bank, where there is still uncertainty over whether it will cling to its hawkish stance, or follow suit with a cut.
