European credit markets opened stronger once more on Thursday extending what has become a fairly consistent rally since the start of April for investment grade corporate debt especially.
Increasing numbers of analysts are coming out in favour of taking on greater risk in credit investment at the opening of the second quarter, though even some of the most bullish warn that there will still be further turmoil to come for the world’s economies.
The cost of protecting investment grade corporate debt against default on the main iTraxx Europe index dropped 4.7 basis points to 148.6bp Thursday morning, according to Markit Group, which puts it down by about 30bp since it hit 178.3bp on April 1 – the high water mark for the latest series of the index which began trading on March 20. This decline means the annual premium on debt insurance has dropped by €20,000 to protect €10m worth of bonds over five years.
Willem Sels at Dresdner, one of the more bearish of credit analysts, said that the stabilisation of ISM index data, which measures manufacturing activity, had much to do with the improvement in credit and that better ISM numbers had led to credit rallies in every cycle for the past 40 years.
But that rally has always been temporary and almost completely reversed. Investors who chase the current rally should be in very liquid products to be able to get out again before the summer, which may be more easily said than done.
Those who are still underweight IG credit should get closer to the benchmark, but it is too early to go overweight. We expect a sustained rally only in Q4 2009, and maintain our neutral allocation for now. Any further rally from here should be relatively shallow and an opportunity to upgrade portfolio quality.
Similarly, this week the credit strategists at Citigroup turned over a new leaf in their view of corporate investment grade credit – even though they beleive talk of economic “green shoots” is most likely overdone.
For the first time in two years we are officially long credit. No question there are many hurdles ahead and ultimately we think the recovery will turn out to be a disappointment, when stimulus is withdrawn. But that’s probably a problem for tomorrow, not today. For now, we reckon the combination of policy intervention and the prospect of a moderation in the rate of decline in economic activity should allow a tightening in credit over the coming months.
However, the Citi analysts see less value in credit default swap markets than in cash markets, which have lagged the recent market rallies and so have greater gains to make.
Among the most improved companies was Gas Natural, which was 35.6bp tighter at 296.7bp. There was news that it had secured 95 per cent of Fenosa and would not have to bid for the rest.
Bertelsmann was 33bp tighter at 290bp on news that its majority owned RTL subsidairy was not on the lookout for any acquisitions.
BMW, Swiss Re, Aviva and Xstrata were also all considerably tighter.