A short-lived rally in the credit default swaps market petered out on Wednesday as investors digested more news of weakness in the US economy and anticipated the Fed chairman’s testimony before Congress.
The latest data showed that US producer price inflation was up, consumer confidence was down and that housing prices have continued to slide.
Mehernosh Engineer, a credit strategist at BNP Paribas, said: “The data suggests the underlying economy is weakening so credit fundamentals are also deteriorating.”
Later today, Ben Bernanke will give his take on the state of US economy in his eagerly awaited semi-annual policy testimony to Congress.
The iTraxx Crossover index, which measures the cost of insuring the debt of 50 mostly-junk rated names against default, rose 3.6 basis points to 544.6bp in morning trade.
That means it costs about €544,000 annually to insure €10m of Crossover debt over five years.
The iTraxx Europe index of 125 investment-grade credits rose 0.9bp to 105.5bp.
Earlier this week the CDS market saw a mini rally, tightening from record highs last week, after the threat of an abrupt downgrade to the top credit ratings of the major bond insurers receded.
On Monday Standard & Poor’s said that Ambac and MBIA, two of the world’s largest bond insurers, deserved their AAA ratings, after the pair made progress in securing new financing.
Yesterday, Moody’s also ended its immediate threat to cut MBIA’s rating.
But analysts said that markets remained wary.
Moody’s changed MBIA’s outlook to negative and noted that it will have to improve its capital position further if it is to retain ratings in the long run.
Moreover, delays in the announcement of the details of a plan to rescue Ambac have also weighed on sentiment.
BNP Paribas said: “The monolines’ saga is not over just yet.”