European credit indices began on a weaker note on Wednesday morning – the day after US president Barack Obama’s inauguration – as fears of a worldwide recession mount. The new president’s inauguration speech yesterday did little to sooth nerves – the cost of buying credit protection for US government debt edged higher to 73.5bp this morning, compared to 71.8bp at the New York close, according to CMA.
Last night’s announcement that the Bank of England will start buying billions of pounds in high quality corporate bonds to kickstart the economy has market participants pondering if such a move could be replicated by the European central bank.
In Europe, CDS spreads for the UK‘s sovereign debt hit a new record at 151.7bp, out from 142.1bp at the New York close, CMA said. In a rare occasion, traders began quoting prices for Switzerland’s debt on Wednesday morning. CDS for Switzerland was quoted at 139.1, around 4bp wider from Tuesday evening, according to the CMA.
Trading volumes in CDS markets are subdued, amid thin corporate newsflow and as buying activity has been interrupted by concerns about European financials, traders said.
The iTraxx main index of European high grade companies edged out to 174bp-179bp on Wednesday, wider than Tuesday’s close at 172bp, and the iTraxx Crossover list of sub-investment grade companies also gapped out to 1062bp-1067bp on Wednesday morning, compared to 1035bp at the close yesterday, according to a trader.
UK financials, spooked by talk that at least one big financial institution could soon be taken over by the government, are weaker again in both credit and equity markets. The cost of buying credit protection for senior debt at Barclays rose to 202.9bp on Wednesday from 197bp on Tuesday evening; while cost of protection for its subordinate debt was indicated at 280bp, compared to 278bp on Tuesday, according to CMA.
The widening trend was also seen in the CDS spreads for UK banking peers Lloyds and RBS - – CDS for Lloyds’ senior debt was at 137.6bp on Wednesday morning, out from 125bp yesterday, while RBS was at 155.3bp, compared to 150bp after the New York close on Tuesday, CMA said.