European credit markets deteriorated on Tuesday as a wave of selling hit the continent’s shares. The iTraxx Crossover – a key barometer of risk appetite – jumped 20 basis points to 559bp.
The possibility that Fannie Mae and Freddie Mac might need to raise more cash knocked Wall Street, which hit Asian and European shares before ricocheting into credit.
But the Crossover index, which measures the cost of protecting a bundle of junk-rated corporate debt against default, remained well beneath its Bear Stearns highs (when it traded above 600bp). The last time the index was at Tuesday’s level was in early April, whereas key equity markets have plunged through their March lows.
The Crossover’s investment grade equivalent the iTraxx Europe gained a modest 4.8 basis points to 111bp.
Jim Reid at Deutsche Bank thinks the credit market is in a more dispassionate frame of mind:
“Vanilla corporate and financial credit continues to hold in ok considering the collateral damage seen elsewhere. The market is compartmentalising where the stresses are better in this sell-off than it did in March. However all bets would be off if a major financial was allowed to default on its debt obligations as would probably be likely in a free market. As we continue to think that this is unlikely to be tolerated, then vanilla credit should continue to out-perform the stresses seen elsewhere, including equities.”
In a sign of that compartmentalisation, the cost of protecting Fannie Mae and Freddie Mac’s subordinated debt rose 18bp overnight to the highest levels since March 17th. Yet the CDX IG index of investment-grade US credit edged 0.1bp lower to 148.8bp.