European credit derivative spreads jumped on Wednesday as investor sentiment was stung by the woes of General Motors and more bad results from the banking sector.
The Markit iTraxx Europe index widened by 9.45 basis points to 155.25bp, creeping back towards a recent high of 171.56bp seen during the wild bouts of deleveraging of late October.
Big movers in the index, composed of 125 investment-grade European debt issuers, were companies involved in or exposed to the automotive industry.
Spreads on 5-year CDS written on Valeo, the car and lorry component manufacturer, widened 38.55bp to 418bp, while Continental AG, Europe’s second-largest car-parts manufacturer, rose by 47.86bp to 621.67bp.
Volvo was also one the biggest percentage losers in the index, with the cost of insuring its senior debt against default for five years rising 28bp to 375bp. On Tuesday the company said it would cut 900 jobs in its Swedish operation after a plunge in demand for its trucks in Europe, its biggest market.
On the impact of GM, Jim Reid, a credit strategist at Deutsche Bank, said:
Basically it appears to be bail-out or bankruptcy… However the exact outcome is near impossible to predict with any certainty as it’s now highly political. Suffice to say that without any kind of bail-out, the unsecured bonds are likely to have a very low recovery. The hope for bondholders is that the US government wants to restructure/support the company without the stigma or negative knock-on impact that Chapter 11 may have to the whole sector, its suppliers and the wider economy.
Investors trading in the iTraxx Europe index were similarly quick to take a view on Italian banks after UniCredit, the country’s second-largest bank, announced a 54 per cent fall in third quarter profits.
Spreads on UniCredit edged up by 3bp to 111bp but CDS written on its compatriot Intesa Sanpaolo were trading at 85bp, 10.15bp higher than yesterday’s close of 75.10bp. Banca Monte dei Paschi di Seiena was trading 4.65bp wider at 73.50bp.
The iTraxx Crossover index of 50 mostly junk-rated corporate issuers widened by 20.40bp to 814bp, a 2.5 per cent rise.
Elsewhere, spreads on the Russian Federation blew out to 627.5bp from a closing price of 455bp on Monday after its central bank widened the roubles’s trading band and raised its benchmark interest rate in a bid to halt record capital outflows.