European credit derivatives rallied Wednesday morning after deals were struck overnight in the US to stop AIG imploding, to hand some Lehman businesses to the UK’s Barclays bank, while there was breaking news in the UK that struggling mortgage bank HBoS was in talks to be acquired by local rival Lloyds TSB.
The rally had begun late on Tuesday in the US after a day that had seen all the main credit derivatives indices breach their widest ever levels. At one point the main US CDX investment grade index was trading tighter than Tuesday’s opening levels, but by the end of the session it closed at 199.9 basis points, just 5.5bp wider on the day.
Morgan Stanley, which rushed out earnings early late in the day, was one name helped out by the general good news in the financial sector alongside its results not being as bad as feared. The investment bank and its rival Goldman Sachs both defended their standalone business model - they are now the only two independent broker-dealers left on the Street.
Morgan’s cost of protection fell to 681.13bp having traded as wide as 841bp yesterday. In comparison, on the Friday before it was rescued in mid-March, Bear Stearns CDS traded at about 736bp.
“The news is certainly positive from a wider market perspective, with a second complete financial failure in two days avoided,” said credit analysts at Deutsche Bank.
The rallying trend followed across the world. In Asia, with the Japan iTraxx CDS index was 24bp tighter. This morning in Europe, the main iTraxx index of investment grade borrowers tightened 16.7bp to 131.5bp. Crossover, the index of mainly European junk borrowers, tightened 27bp.
News that HBoS may merge with Lloyds TSB has helped push down the cost of protecting against default of HBoS’ debt. HBoS CDS was quoted at 357.5bp having closed at 477bp Tuesday.
Credit markets however did not receive well the news that BAA, the UK airports operator, would sell its Gatwick airport. Credit default protection widened to 216bp having closed Tuesday at 209bp.
Also all was not well in investor’s views of Iceland as its main banks saw their CDS breach 1,000bp again.
Reporting by Anousha Sakoui and Paul J Davies