European credit spreads widened to their highest levels in two weeks on Monday after the G20 summit provided no balm for bruised credit investor sentiment.
Meanwhile, bankers at Citi and JP Morgan braced themselves for a further swing of the axe, and Japan and Hong Kong officially entered recession.
Mehernosh Engineer, senior credit strategist at BNP Paribas told FT Alphaville this morning:
The G20 didn’t do much. There were a few statements but that was about it. Nothing concrete has come out of it, no guidance or anything of that sort - it is very disappointing.
The benchmark Markit iTraxx Europe index of five year CDS written on investment-grade corporate debt widened by 6.2 basis points to 160bp, while the iTraxx Crossover of 50 mostly junk-rated companies widened 33bp to 865bp. This means it now costs €160,000 per year to protect €10 million worth of bonds.
Trading volumes were low but analysts were expecting volatility during the week because of a large number of credit derivatives options expiring on Friday.
Among the single name CDS trading wider in the Europe index was British American Tobacco after it announced it had issued close to a billion dollars of five and ten year bonds at a spread of 600bp over treasuries. 5 year CDS on BAT was trading 37bp wider at 260bp.
Jean-Yves Coupin of BNP Paribas said while the primary bond market was troubled, the BAT issuance showed there was still investor appetite for defensive, predictable company bonds such as tobacco, and that the 600bp spread was similar to the recent issuance by Altria.
BAT is trading quite tight for a BBB rated company. If you look at the sector, Imperial Tobacco, because of its high leverage, has its CDS at about 350 bp. More defensive retail names in continental Europe are trading in five-year CDS at around 200bp so BAT compared to that is relatively expensive. I am not surprised considering the spreads they offering in the primary market that the CDS spread are drifting a bit wider.
Deutsche Bank CDS was also wider at 119bp, a rise of 5bp, while spreads on Banco Santander, the owner of British high street bank Abbey, were up 3.29bp to 81bp.
