European credit derivative markets extended their rally on Wednesday, taking a key index into territory not seen since early December – despite European equities being broadly down.
A feel good factor has held in the new year - despite some negative fundamentals – with signs of life in the primary bond market. However, most of the drive tighter in credit derivatives indexes this morning has been driven by short covering. According to Suki Mann, credit strategist at Societe General, those investors long of credit protection have been looking to close positions as a precautionary measure against a possible sustained rally.
Most European credit derivatives indexes were tighter, with the Markit iTraxx Crossover index, a key benchmark of corporate credit sentiment, inside the 1000 bp mark for the first time for more than a month. The moves tighter follow another strong day in US credit markets on Tuesday, with indexes there closing tighter across the board.
Despite the Markit iTraxx Japan CDS index closing 9.13bp wider overnight at 284.88bp, the European iTraxx main index of investment grade borrowers’ CDS was quoted at 156bp on Wednesday morning, versus a closing level yesterday of 166.81bp.
CDS written against JTI Finance , a subsidiary of Japan Tobacco, has been one the biggest underperformers of the index. Its CDS was quoted at 51.45bp on Wednesday versus Tuesday’s closing level of 48.22bp. BP CDS was also wider at 74bp versus a close yesterday of 72bp, after rumours of a profit warning from BP – later denied by the company to wire reports.