European credit markets weakened again on Wednesday after the previous days improvements as markets generally saw the glow added by Tim Geithner’s public-private investment programme fade more rapidly than even the cynics had expected.
The main iTraxx Europe list of investment grade companies rose 7.20 basis points to 168.95bp by mid-morning, according to data from Markit Group, meaning it now costs €168,950 annually to insure €10m of bonds in the index against default. The iTraxx Crossover list of mainly junk-rated debt was 14.23bp higher at 918.63bp.
The increases in the cost of protecting corporate debt against default in Europe followed similar moves overnight in the US when stocks also retrenched following the sharp rally in the wake of the US Treasury Secretary’s announcement on Monday. The cost of protecting US investment grade bonds against default on the CDX index had risen2.92bp to 188.06bp.
Analysts at BNP said that the credit market reaction to Geithner’s plan this week had been muted at best.
Credit has underperformed equity markets, as the magnitude of the tightening has been very modest in relation to the overall equity market bounce from its recent lows. Similarly, cash spreads have hardly tightened over the past week.
Among the worst performing companies on Wednesday was ThyssenKrupp, the German steelmaker, which was 29.99bp wider at 256.25bp after being put on watch for downgrade by Moody’s. Veolia Environnement was 24.06bp wider at 189.17bp and Volkswagen was 22.61bp wider at 286.67bp. Groupe Danone, Deutsche Telekom and Portugese utility EDP also suffered.
In the UK, attention was focused on the Bank of England’s plans to begin buying corporate bonds, with up to £140m worth of bonds from the likes of Tesco, Aviva and Eletricite de france. An announcement on the result of the opening tender auction is expected at 1pm, but many analysts remain unconvinced at its chances of success.
For example, Willem Sels at Dresdner Bank wrote this morning:
Market makers’ risk appetite will be boosted only if the BoE buys those bonds that investors and banks dislike, but this may not be the case. For the plan to be effective, other central banks may need to join.