Spreads on European credit derivative indexes widened Wednesday morning, driven by unwinding of shorts in the market following yesterday’s tightening, while also tracking the equity markets’ trip south.
The European iTraxx Crossover index, made up of the CDS of junk bond issuers, was 22 basis points wider at 584bp. The main Europe index, which is linked to financials and investment grade borrowers, broke through the 100bp level again to trade at 107.75bp.
Analysts at Dresdner Kleinwort said: “Equity markets continue to worry about the GSEs, and their initially positive reaction to Paulson’s plan only lasted a couple of hours. They continue to worry about capital needs in a broad section of the financial sector, and the potential dilution. Moreover, the administration’s focus on moral hazard accelerates the price declines when an institution is seen as being close to that critical level. Credit should continue to outperform, but Europe 125 can only briefly dip below 100bp.”
The borrowers that saw the greatest deterioration in their CDS over the past day include Allied Waste, which widened sharply following news that Waste Management had offered to buy Republic Services for $6.3bn. Republic last month agreed to acquire Allied Waste, and this new development clearly places that combination in doubt, according to Markit. Allied Waste CDS widened 118bp to 283bp.