European credit markets were non-plussed by a mass global coordinated central bank rate cut on Wednesday.
“It does not do anything to change the price of money, it is the availability of money (that is the problem)”, explained one credit trader. Despite efforts to shore up global liquidity issues by central banks across the world – some areas of the credit markets just remain unconvinced by the moves.
“One could argue that that in terms of wider macro effectiveness, cutting interest rates at this stage of the credit crisis may be as useful as ‘pushing on a string,” said analysts at Deutsche Bank in a note this morning.
The European main Markit Itraxx index was tighter by five basis points at 120bp, according to Markit. The index is made up of credit default swaps on investment grade debt, in particular that of banks. The tightening was driven by moves to bail out the banking system which led to the cost of default protection for UK banks falling. Barclays CDS was quoted at 136.7bp versus a close of 200bp yesterday and Royal Bank of Scotland was 204bp versus 293bp yesterday.
But overall sentiment toward European corporate credit remained poor. Both the Crossover index of mainly junk rated borrowers’ CDS and the HiVol index of the most volatile investment grade CDS were winder on the day, although off their highs.
The Crossover was quoted at 617bp versus a closing level of 615bp and in pre-cut high of 640bo and the HiVol index 244bp versus a closing level of 242bp. But a five or 10 bp move is not important, either way, said one credit strategist. US credit markets were quoted tighter in early trading.
According to Markit the main US investment grade index was 171bp versus a close of 180bp and the US junk bond CDS index was 458bp versus 467bp. Yesterday’s move by the US Fed to intervene in the commercial paper market and buy up paper boosted corporate CDS, particularly for those companies believed to be most reliant on CP. GE Capital Corp was one example its CDS was tighter by 113 bp at 517bp yesterday.