European credit markets opened much weaker Monday morning, depressed by the rout in falling equity markets and falling prices of cash bonds as European governments continue to try and prop up their banks across the region.
Deutsche Bank’s Jim Reid noted that while equity markets are not particularly stressed, the same could not be said for credit. Reid believes equity markets would be 20 per cent lower if they priced in what is going on in credit markets. US high yield cash bond spreads hit their widest ever levels on Friday and cash investment grade bonds further extended their record high spreads.
To wit:
The CDS indices still being inside their March 2008 wides completely understates the turmoil in the cash high yield and investment grade markets. Unwinding SIVs, zero broker appetite for risk, money market stress and a real money community crippled by fire fighting problems within their funds has left cash credit at levels that if trading on fundamental default risk would be signalling a deep Depression in investment grade and deep recession in high yield. If credit markets are correct then equity markets should surely be at least 20 per cent lower and that’s probably conservative. Unless credit markets can be fixed then the risk to equity markets and the economy are immense.
The Markit Itraxx credit derivative indices in Europe were all trading much wider Monday morning. The Main index of mostly investment grade borrowers was quoted at 134 basis points, having closed Friday at 125bp. The Main index is heavily influenced by the performance of financial sector borrowers’ CDS as they are a big constituent of the index.
The Crossover index of junk rated borrowers’ credit default swaps, often used as a barometer for sentiment toward the credit markets, was quoted at 635bp versus a closing level Friday 606.7bp. And the HiVol index of the most volatile investment grade borrowers’ CDS was quoted at 255.5bp Monday morning having been quoted at 237.9bp Friday.
The US indices had closed tighter Friday following the eagerly awaited adoption of the $700bn government bail out plan. The main investment grade index closed at 166bp, tighter by 5.17bp. The high yield index of US junk rated borrowers’ CDS was 6.29bp tighter at 842.81bp and the HiVol index was quoted 2.72bp tighter at 453bp, according to Markit.
And as if further proof were needed of the global reach of the financial crisis, five year credit default swaps written against banks stretching from the US, Iceland, Belgium, India and Korea have widened sharply.
Credit protection on ICICI bank widened to unprecedented levels, adding 150bp to 728bp, according to Markit.
But on a more positive note the cost of protecting against default on Wachovia’s debt is now trading tighter than that of its prospective acquirer Citigroup, after a rival bid emerged, say analysts at Markit. Wachovia;s CDS has tightened a massive 158bp to 243bp.
Meanwhile, analysts at Deutsche Bank say they believe it could be an interesting few days for sovereign CDS trading. “European governments are dazed and confused and this isn’t helping confidence and will probably end up costing them more in the long-run,” they said.