European credit spreads fell for the second day running on Wednesday, driven by a combination of optimism about bank debt and technical effects ahead of the upcoming index roll.
Better-than-feared results from Goldman and Lehman Brothers on Tuesday, along with growing confidence that authorities will not allow large banks and brokers to fail, helped sentiment.
Trading activity related to the upcoming indices roll also played a part in driving spreads lower. Traders were unwinding their long positions in Series 8 of the iTraxx indices — by selling credit protection using credit default swaps — before they look to buy protection again on Series 9 due on Thursday.
The iTraxx Europe, which measures the cost of protecting 125 investment-grade credits against default, fell 5.5 basis points to 127.75bp. This means it cost €127,750 per year to insure €10m of iTraxx Europe debt over five years.
The iTraxx Crossover of mostly junk-rated credits tightened about 6 basis points to 569.75bp.
However some analysts said the rally could soon peter out. “We do not think the positive momentum will continue for long with the fundamentals remaining so weak,” said Willem Sels, credit strategist at Dresdner Kleinwort. “Yesterday’s US building permits, which lead construction activity, are particularly bearish for that area of the economy, and delays a potential recovery of the US consumer.”