Credit markets staggered back from the brink on Tuesday, pulling away from Monday’s all-time highs for Europe’s credit indices.
But without any positive news, the mood remained edgy as credit investors eyed sinking stocks.
The iTraxx Europe, which measures the cost of protecting 125 investment-grade credits against default, was at 127.3 basis points, 3.3bp lower than Monday’s close. This means it cost €127,300 annually to insure €10m of iTraxx Europe debt over five years.
The iTraxx Crossover, an index of 50 mostly junk-rated credits, fell back by 17.6bp to 590.2bp.
“The market’s in a nervous mood stemming from weak equities globally, said Mehernosh Engineer, credit strategist at BNP Paribas. “The data from the US is continually coming in weaker than expected; we think the recession could be more severe than consensus estimates.”
Analysts at BNP Paribas pointed out in a note today that commercial real estate values are starting to sink in the US. This will cause pain not only for people who own commercial real estate, but also for those that hold securities backed by their mortgages.
“The value of CMBSs (commercial mortgage backed securities) is down by about 5% since last year and, as a result, banks could suffer additional writedowns. The most exposed institutions are Lehman Brothers ($40b), Citigroup ($27bn), Merrill Lynch ($25bn), Morgan Stanley ($17bn), JP Morgan ($15bn) and Bear Stearns ($14bn),” BNP Paribas wrote.
Mr Engineer said concerns about commercial real estate were feeding into the credit market’s bearish mood.