Credit spreads crept wider in Europe on Wednesday as poor economic data from the US took the edge off the market’s bullish mood.
The week’s storming rally petered out as credit investors weighed up fresh data showing falling house prices and plummeting consumer confidence in the world’s biggest economy.
“The biggest difficulty we have at the moment when thinking about the credit market is separating out our macro view from our relative value credit view,” wrote Jim Reid at Deutsche Bank in a note to clients.
While most investors remain bearish on the macroeconomic outlook, the idea that the Federal Reserve (and other governments) will stand behind struggling financials seems to haven taken hold.
“We still think that financials will be saved if the situation arises but that corporates won’t necessarily be as fortunate,” Mr Reid added.
The iTraxx Europe index, which measures the cost of protecting the debt of 125 investment grade European companies, gained 3.9 basis points in morning trade to 113.7bp. The iTraxx Crossover index of 50 mostly junk-rated borrowers widened by 11.2bp to 548.9bp.
The investment-grade index has been underperforming the Crossover in recent months, but some analysts say the perceived safety of major financials should turn attention back towards high-yield names like those in the Crossover, as they are most vulnerable to economic downturn.
But slumping US house prices is bad news for big banks as well as the US economy, analysts at BNP Paribas pointed out in a note to clients: “This will lead to a pick-up in delinquencies in the foreseeable future, resulting in more pain with CDOs and an additional round of write-downs by financial institutions,” they wrote.