European credit derivatives markets enjoyed a relative lull on Friday morning, with the investment-grade iTraxx Europe holding steady around the previous session’s closing level, and the iTraxx Crossover widening only slightly. Positive moves in global equity markets helped credit derivatives hold their ground as investors pinned hopes on President Obama’s anticipated bailout package.
But analysts warned that government intervention and growing anxiety over protectionist policy noise could easily disturb the peace. Mehernosh Engineer at BNP Paribas pointed out that 5-year CDS for US sovereign debt had reached a new high, around the 70bp level, this week.
Mr Engineer said:
The markets have been behaving in a very healthy manner, brushing aside the grim tide of news, and rightly so, as most of it has been factored into valuations and prospects for reflation remain high in the second half of 2009. But caution is warranted, because politicians have begun to meddle with the capital markets. Clearly, the markets are getting wary whether the protectionist and anti-capitalist rhetoric coming from US politicians over the last week will be translated into action.
The iTraxx Europe index, which measures the cost of protecting the debt of 125 investment grade European companies, held firm in morning trade around 155bp, while the iTraxx Crossover index of mostly junk-rated corporate debt was a measly 2.4 bp tighter at 1042bp.
The telecom sector saw its credit default swaps broadly improve, after the chief executive of Telefonica Europe, Matthew Key, said its O2 unit had been “very successful” in the first nine months of 2009, and expected to outperform the UK market in the fourth quarter. “We’re resilient but not immune,” he said, adding that the group had benefited from healthy sales of SIM-card only contracts, sales of mobile broadband and high-end handsets. CDS on Telefonica tightened 3bp to 91bp.
Meanwhile, Telecom Italia tightened 4bp to 330bp, after its chief executive reassured investors that there were no plans to spin off its fixed-line network. Elsewhere in the sector, British Telecom‘s 5 year CDS tightened 3 bp to 150bp.
Rank Group‘s five-year CDS tightened by 15 basis points to 430bp, after the British casino and bingo operator announced that Hong Leong, the Asian conglomerate, had raised its stake in Rank to 26.01 per cent on February 2, up from 25.01 per cent last year.