European credit-derivative markets had another weak morning on Wednesday, following falling equity markets, and growing concerns that the credit markets could deteriorate.
Willem Sels, credit strategist at Dresdner Kleinwort, believes the relative out-performance of credit markets versus equity markets in the past couple of months is fading. Moreover he highlighted growing concerns among credit investors that after having to face potential losses in the financial sector, they are now starting to face pressures from governments to make greater concessions in the non-financial corporates such as the GM bondholders.
The Markit iTraxx Crossover index of mostly junk rated borrowers’ CDS – contracts that provide a form of insurance against default on debt- widened to 956.17bps having closed at 946.4bps and traded as wide as 965bps earlier in the morning.
The iTraxx Europe main index of investment grade borrowers’ CDS was quoted at 176bps, having closed on Tuesday at 172.38bps, and was trading as wide as 177bps earlier on Wednesday.
US credit derivatives markets closed worse too, with the CDX North America investment grade index closing 2.82bps wider at 195.57bps, according to Markit. The Japan CDS index also closed wider, by 20bps, at 425bps.
Some of the worst performers of the morning were British Telecom’s CDS which hit a record high of 265.72bps having widened by 10.58 per cent, according to data providers CMA. Securitas and Suzuki Motor Corp also saw their CDS widen by 22.82 per cent and 11.88 per cent respectively.
The risk premia on the subordinated debt of banks has continued to rise. Abbey National sub debt CDS was wider by 7.84 per cent at 275bps. HSBC and Banco Popolare sub debt was also wider.