The cost of protecting European corporate debt against default rose on Thursday as investors lost faith in a start-of-the-week rally.Overnight, Moody’s hinted it may cut the Aaa rating of Sigma Finance, the SIV-like finance company run by London-based asset manager Gordian Knot, which could affect $27bn of debt, lead to forced sales and impact markets.
Then too, analysts suggested the initial euphoria over a putative $3bn capital injection to rescue Ambac, the embattled bond insurer, has dissipated.
“Even debt capital can be wiped out pretty quickly if markets continue to deteriorate,” said Willem Sels, an analyst at Dresdner Kleinwort.
The iTraxx Crossover index, which measures the cost of insuring the debt of 50 mostly-junk rated names against default, rose 17.4 basis points to 564.1bp in morning trade.
That means it costs about €564,000 annually to insure €10m of Crossover debt over five years.
The iTraxx Europe index of 125 investment-grade credits rose 5.1bp to 109.7bp.
On Monday and Tuesday the CDS market rallied, tightening from record highs last week, after the threat of an abrupt downgrade to the top credit ratings of the major bond insurers receded.
Since then new data showing continuing weakness in the US economy has weighed on market sentiment.
Moreover analysts believe that technical factors, such as the unwinding of CDOs and CPDOs (constant proportion debt obligations), remain at work in the relatively high prices of insuring debt.
Rajeev Shah, a credit strategist with BNP Paribas, said those issues were contributing to uncertainty among investors and volatility in the market.
“Markets have yet to find a clear direction, but nervousness will likely keep spreads at elevated levels.”
