The cost of protecting European corporate debt against default fell on Wednesday, as traders paused for breath after the previous days’ violent swings.
But analysts said the previous day’s emergency rate cut by the Fed had failed to shake the entrenched pessimism from the credit derivatives market.
“Investors view rate cuts in their context and look at the weak cycle that motivates the cuts,” analysts at Dresdner Kleinwort said in a note. “We think they do little to the housing market, bank liquidity and monoline worries that dominate the market sentiment.”
The iTraxx Crossover index of 50 mostly junk-rated companies tightened by 11 basis points to about 475bp in morning trade. This means it now costs €475,000 annually to insure €10 million worth of mostly junk-rated corporate debt against default over five years. On Tuesday the Crossover hit a record 530bp in volatile trade.
The iTraxx Europe index of 125 investment-grade names tightened to about 80bp, against a close of 81.5bp on Tuesday.
Jim Reid at Deutsche Bank said the severity of problems in the credit markets demanded government intervention:
On one hand it’s becoming increasingly clear that left to its own devices the credit bubble could easily collapse under its own weight and into a total “once in a generation” mess. However on the other hand, if we can see these risks then so can Central Banks, Governments and Regulators.
The probability of a recession remains high though, but we expect to see initiatives, rate cuts, bail-outs, fiscal stimulus, etc., etc. along the way to attempt to reduce, or perhaps delay, the risks.
While the unraveling of [the monoline] sector is a realistic scenario and potentially catastrophic, there will be plans being devised behind closed doors to try to avoid it.
