Sovereign risk proved to be the highlight of the credit markets this week with the perceived worthiness of some leading European nations weakening for the first time.
Credit default swap protection against Austrian sovereign debt was 85 basis points wider in the week, at 240bp. Meanwhile, the risk premia associated with Germany and France — mostly unaffected thus far– also rose. This was largely down to concerns the nations could be forced to rescue other European sovereign states, according to Suki Mann, credit strategist at Societe Generale in London.
While the spreads do not indicate impending default, they do reflect the increased pressures the countries’ finances are facing.
Germany’s CDS is 22bp wider this week at 86bp, and France’s CDS is also up 18bp at 88bp, a roughly 25 per cent rise for each.
Overall, European credit derivatives markets were a touch worse on Friday morning, guided wider by negative equity markets in the morning.
The European main iTraxx index of investment grade borrowers’ CDS was quoted at 175bp, the widest levels in weeks. Last night it closed tighter at 167.75bp.
The crossover index of mainly junk-rated issuers was wider at 1078bp, still inside the 1100bp mark, having closed tighter the day before at 1063.83bp.
Overnight, Japanese credit risk moved into positive direction, the iTraxx Japan index closing overnight 9.76bp tighter at 501.67bp, according to Markit. That follows a 30bp widening this week.
Meanwhile, in the US, credit markets generally closed better across the board on Thursday. Sentiment improved in the UK too, with the sovereign’s CDS 5bp tighter at 158bp on Friday morning. The move follows a widening of 23bp in the week.