European credit derivative spreads tightened on Monday as the US Treasury’s plans to inject $20 billion into Citigroup soothed frayed sentiment.
The Markit iTraxx Europe index of credit default swaps written on investment grade debt narrowed to 173.7 basis points, down from a Friday closing level of 183.25bp.
The iTraxx Crossover index of mostly junk-rated debt eased below the 900 barier to trade at 890.83bp having closed Friday at 914.72bp.
Most credit derivative indices broke through their all-time highs last week after Hank Paulson’s Tarp reversal led to plunging asset backed securities’ prices, and growing concerns about the knock on effects on the banking sector.
Jim Reid, a credit strategist at Deutsche Bank said: “Since the TARP U-turn of 12 days ago Paulson has lifted the delicate lid off the pressure cooker that is the credit universe. Stressed mortgage assets were this lid and this has been blown off over the past week. Banks owning these assets, and other assets brought down by it (fixed income, loans and equities) will have to take fresh write-downs unless we see a rebound soon.”
The Markit ABX indices which track the performance of mortgage- backed securities was again down across the board. Even the top rated tranches of the index were down 2.61 points to 28.39 cents. The lowest rated tranches are worth just a few cents, down 0.11 points to 3.69 cents.
The credit quality of most of the G7 continued to deteriorate, with the exception of Italy. Over the last week, the UK has seen its CDS increase by a third, nearly double the cost of protecting against German government debt.
The US and Japan saw the biggest moves in the cost of default protection on the debt they issue. CDS against US debt was 7bp wider at 42bp. The move came as markets prepare for possibly some $600bn of US government guaranteed bond issuance, after FDIC finalised the terms of the latest bailout plan on Friday.
Credit markets were taking a more negative view also of Portgual, Denmark, Belgium, Slovenia and Egypt.
In European corporate credit, Markit noted improvement in the CDS of FKI, Ladbrokes, and Fiat, as well as TUI and Anglo American. But concern is growing about Continental, Lufthansa, Lafarge and Ericsson, reflected by widening in their CDS.