European credit spreads were lurching back towards “Armageddon levels” on Wednesday, flirting with their all time highs as speculation mounted over a bail-out for US carmakers. The Markit iTraxx Europe index of investment grade corporate debt widened 12.9 basis points to 175bp, up from a Tuesday closing price of 162bp. The iTraxx Crossover widened by 27.8bp to 899.46, teetering on the brink of the symbolically important 900bp mark last crossed in the fallout after Lehman Brothers collapsed.
The cost of insuring €10 million in the Europe index for five years is now €175,000 per year, while the annual cost of protection in the mostly junk-rated Crossover index is €899,460.
The record spread levels for the investment grade iTraxx Europe index currently stands at over 190bp, while the Crossover touched a giddy intra-day high of 925bp back in late October.
Henry Paulson’s Tarp volte-face however could provide credit markets with that extra momentum to burst through levels previously thought absurd.
Jim Reid of Deutsche Bank said:
The fact that Paulson is now not going to buy beaten up mortgage assets, and is also not going to use the extra $350bn TARP money while still in office has in effect raised the potential ceiling for corporate credit spreads again – at least in the short-term.
On a possible bailout for US automakers Mehernosh Engineer, a credit strategist at BNP Paribas said:
We are getting back to what we call an Armegeddon level. If the bailout goes ahead there will be a positive reaction in the credit markets for a small time because we wouldn’t expect any major risk to arise at least until the end of the year – this is last big decision for 2008. But we need to resolve this in the next 48 hours.
Big shifts in single name spreads on the Europe index included Commerzbank. CDS written on the German bank widened 3.4bp to 69.59bp as the DAX tumbled for a seventh day and investors fretted over how deep the German recession would be.
Glencore CDS spreads also ratcheted higher, gaining 34.4bp to 1350bp as the company continued its recent run as the basket case of the Europe index.