The cost of protecting high-risk European corporate debt ballooned past record levels on Tuesday as investor sentiment was battered by cascading global equities and brutal economic data. The National Bureau of Economic research confirmed on Monday the US economy had been in recession since December 2007, while PMI data from the Eurozone, US and the UK were weaker than predicted. The five year Markit iTraxx Crossover index, composed of credit default swaps written on 50 mostly junk-rated European corporates, widened 13bp to 950bp. The iTraxx Europe index of 125 investment-grade CDS widened 3bp to 189bp in early activity.
Some traders quoted the iTraxx Europe at blown-out wides of 198.5bp – a series record – at around 7.30am on Tuesday, but said spreads on the index later fell back to around the 190 mark.
The HiVol five-year index of investment-grade CDS with the most volatile spreads also reached record levels of 478bp, up 1bp.
Spreads on companies seen as particularly exposed to a prolonged global slump like cement makers and engineers were among the biggest movers. CDS written on Lafarge, the building materials firm, widened by 17.5bp to 957bp, while GKN, the engineering group widened 22bp to 852bp.
Earlier this morning Markit’s Gavan Nolan said both firms could see their investment grade rating come under increased pressure if their credit profiles were not bolstered in the near future.
More suffering also came the way of steelmaker Arcelor Mittal, which gained the dubious distinction of becoming the third component of the iTraxx Europe index to trade above 1000 basis points. Its CDS were trading unchanged at 1035 on Tuesday morning.
Arcelor Mittal could now join Glencore and Continental in trading ‘upfront’, meaning default is seen as so likely a down-payment is demanded by protection sellers at the start of a CDS cycle instead of yearly payments.