The cost of protecting European corporate debt against defaults fell on Monday after news of a rescue plan for Ambac, the US bond insurer, provided some relief to credit derivatives markets.
But analysts said the rally was muted given last week’s violent swings to record highs, and were sceptical of a sustained tightening.
“It is fairly reassuring news for a spooked market in the short term,” said one senior analyst at a European investment bank.
But he added that in the longer term, deeper macroeconomic problems and escalating writedowns would continue to weigh on sentiment.
The iTraxx Crossover index, which measures the cost of insuring the debt of 50 mostly-junk rated names against default, fell 28.5 basis points to 548bp in morning trade. Equating to €548,000 annually to insure €10m of Crossover debt over five years.
The iTraxx Europe index of 125 investment-grade credits fell 10.75bp to 113.5bp.
Last week, credit derivatives indices across the world surged on fears that the market would enter negative feedback loop as structured products were unwound.
Looking ahead, markets will be focused on Ben Bernanke, chairman of Federal Reserve, as he outlines his predictions for the economy on Wednesday.
Ben Bennett, an analyst with Lehman Brothers, said: “One thing is fairly guaranteed, there is more volatility to come.”
By Jeremy Lemer