The cost of protecting European corporate debt against default jumped on Monday as benchmark credit derivatives indices tracked falling global equities.
The Markit iTraxx Crossover index of credit default swaps written on 50 mostly junk-rated European corporates rose 39 basis points to reach an all-time high of 929 bp. The iTraxx Europe index of investment grade CDS was trading early on Monday at a midpoint of 183bp, a rise of 13bp.
At these levels, it costs €929,000 annually for five-year protection on the Crossover, and €183,000 per year on the five-year Europe index.
But while credit derivative indices continue to oscillate wildly, traders said high spreads should be viewed within the context of thin liquidity.
Several traders said there was little activity from institutional investors, with the handful of trades being processed coming from market-makers proprietary desks.
The jittery sentiment of buy side investors was surmised by Willem Sels of Dresdner Kleinwort as such:
Credit investors at this point are not afraid of losing out on a rally. They have been burnt enough already to be patient and miss the first ten or twenty basis points of a rally. They probably feel it is worse to be too early than to be too late.
It is going to be a matter of if we have overshot, and if we can partially retrace the overshooting. It is certainly not the time yet to see a sustained rally. I think there is too much uncertainty for that so the only thing we are discussing with clients is a bit of a bear market rally. What many investors are concerned about is that there is still a lot of uncertainty in the short term.
In single name activity credit spreads for the French Banks Credit Agricole and Societe Generale moved wider. Spreads on Credit Agricole were 7bp wider at 71bp, while Soc Gen spreads rose 10bp to 103bp.
The lack of trades registered on the iTraxx Europe for Credit Agricole and Soc Gen underline the thin volumes in both names.
Meanwhile, overnight in Japan the benchmark iTraxx Japan index rose 15 basis points from Friday’s price to 330bp, driven by fears over the impact an appreciating yen will have on Japanese exports and tracking Monday’s fall in Tokyo equities.