European credit-derivative markets failed to follow the joy that pushed equities higher on Friday morning.
The European iTraxx Crossover index of mostly junk-rated borrowers’ CDS — contracts that provide a form of protection against default on debt– were relatively unchanged, quoted at 823.3bps having closed at 828.2bps on Thursday night. It reached a wide spread of 832.75bps earlier in the morning.
The Europe main iTraxx index of investment grade borrowers’ CDS was also relatively unchanged at 146.32bps versus a closing spread of 147.88bps. It traded as wide as 149.44bps earlier in the morning session.
Mehernosh Engineer, credit analyst at BNP Paribas, highlighted the disconnect between credit markets and equity markets in a note:
“Funding conditions and economic factors are improving but not at the pace indicated by equity values, which remain overvalued for the macro scenario we envision over the medium term.”
While some analysts are positive on credit, the BNP Paribas analysts also highlighted a looming problem for credit markets:
“We expect a combination of (i) further weakening in the economy leading to sharp profit declines; (ii) large and looming refinancing risk, and (iii) a further decrease in risk and bank lending appetite, will lead to higher stress and defaults.”
US CDS indices closed tighter across the board overnight. The iTraxx Japan CDS index closed 4bps wider however at 304.25bps.