Credit derivative markets in Europe were just a touch tighter on Thursday morning following stocks as traders squared up positions for the end of the month and the holiday weekend.
Jim Reid, credit strategist at Deutsche Bank said the pace of contraction appeared to have eased in the US, leading US credit and equity markets to rally.
“Whilst the US economy continues to contract, the pace of contraction appears to have eased somewhat with household spending showing signs of stabilisation. US credit and equity markets rallied with financials leading the way, likely caused by short-coverings, given the build-up of negative pressures around financials in the past days.
The CDX (North America investment grade CDS index) closed 9 basis points tighter at 168bps, US banks’/financials’ CDS were 10-30bps tighter. Goldman Sachs also issued a five year non-government guaranteed deal (+410bps) and traded 20-30bps tighter in secondary market. The S&P 500 closed 2.2% higher with Financials up by 4.8%. The fact that GS could sell such a deal ahead of the official stress test results was seen as a big positive for the market.”
This morning European credit derivative markets rallied on the back of this strength. The Markit iTraxx’s main index of investment grade borrowers’ CDS contracts, which give the buyer a form of protection against default, traded as tight as 140.64bps from a closing level of 145.5bps the previous session. The Crossover index of mainly junk rated CDS was quoted in the morning as tight as 812.5bps versus a closing level of 826.75bps the day before. By the afternoon, however, the index re-widened to 824.5bps.
Despite the Swine flu pandemic and the effects it might have on economies, the index tracking emerging market CDS tightened 15.97bps to 492.82bps, which comes in the context of a 116.89bps tightening over the course of the last month.
CDS protection against Mexico defaulting on its debt, meanwhile, fell 29bps to 264bps. UK CDS remained unchanged at 101bps.