European credit derivatives saw spreads move slightly tighter on Wednesday as market worries eased over the health of the balance sheets of the US banks.
Markit’s investment grade iTraxx Europe index narrowed a touch ahead of the UK Budget, settling at 156 basis points – 3bp tighter than the London close.Markit’s mainly high-yield iTraxx Crossover index also narrowed to 869bp – 12bp tighter than the London close.
Each basis point is equivalent to the cost of €1,000 annually to insure €10m of bonds against default over five years.Flows were thin, but sentiment overall was firmer than at the start of the week as the market digested US Treasury secretary Tim Geithner’s comments that most US banks had enough capital to keep lending.
There had been worries at the start of the week over the stress testing of US banks. The methodology for the stress testing is due to be announced on Friday.The International Monetary Fund also revised up its expectation of total bank losses in its global financial stability report on Tuesday, which the credit markets took in their stride.