European credit default swap markets tightened on Thursday amid light flows as the financial crunch continues to hit liquidity.
The market followed equities, which pushed higher on the back of rising banking stocks following the passage of the $700bn bail-out package through the US Senate.
Suki Mann, credit strategist at Societe Generale CIB, said:
Activity has fallen across the board. CDS is still the most liquid credit market, but it has dried up like the rest of credit in these financial conditions.
The investment grade iTraxx Europe index narrowed by 7bps since the Wednesday close to stand at 116bp, or a cost of €116,000 per annum to insure €10m of debt. The iTraxx Crossover high-yield index narrowed by 2bp to 574bp.
CDS on the sovereign debt of Iceland continued to widen on worries over the banking sector. Traders said it had shot over 800bp on Thursday after closing at 718bp on Wednesday. Glitnir, the country’s third largest bank, which the government nationalised this week after repo facilities with other banks were not rolled over, also remains under pressure. Its CDS are now trading around 1,500bp. A level over 1,000bp usually implies the institution is in danger of default.
In Asia, the cost of credit protection rose slightly in Japan. The iTraxx Japan index – the benchmark for Japanese corporate CDS – widened to 169bp from Wednesday’s close of 164bp.
In US trade, GECC, the financing arm of General Electric, saw its CDS stabilise at 541bp, a touch tighter after a week of sustained widening: The company announced it would offer $12bn of common stock and had also sold $3bn of perpetual preferred stock with a 10 per cent dividend to Berkshire Hathaway, helping to dispel fears of default.