On Monday credit derivative indices across Europe hit levels not seen since mid December on news that distressed insurer AIG was receiving further government assistance and also news that HSBC was issuing an unexpected cash call.
Underlying the negative sentiment was concern about the depreciation of asset valuations. There was also a fear that unprecedented supply in the bond markets from both governments and corporates could have a negative impact on the cash bond markets, the positive performance of which lately had been a boost to fund managers.
“It feels like we are slipping into an ugly March…new bond issues which had traded tighter since their launch are now wider again, which highlights the fatigue in the market,” said one head trader.
The European Markit iTraxx crossover index of 50 mostly junk rated borrowers’ CDS was back above 1100 – quoted at 1115bp on Monday, having closed at 1080 on Friday. The crossover is a good indicator of market sentiment towards corporate credit. The main Europe index of investment grade borrowers’ CDS -often used as an indicator of the sentiment towards financials – was also up at mid-December wides, quoted at 189.2bp versus a closing level Friday of 180.36bp. Volumes, however, were muted.
US credit derivatives markets all closed wider, although Japan closed at 480.4bp overnight -19.24bp tighter.
In European corporate credit Aegon, Metro and Peugeot were some of the under-performers. While Publicis, Valeo and Clariant all saw CDS premiums fall.
UK, Germany, France and Italy also saw their CDS premiums fall.