This CDS update was written by Markit’s Gavan Nolan
Credit outpaced equity today, with the major CDS indices rallying sharply. The Markit iTraxx Europe was trading around 127bp, nearly 9bp (6.5%) tighter than yesterday’s close, while the Crossover was 30bp (4%) tighter at 758bp. Widening credits were scarce, though defensive sectors lagged behind more cyclical names. Banks were among the best performers, led by Bank of Ireland. The Irish bank’s decision to boost its capital position through buying back deeply discounted debt in the secondary market was well received by credit and equity investors. The news helped to obscure a worrying increase in loan loss estimates.
Marks & Spencer tightened in a strong session for retailers. The UK high street chain disappointed with a 37% decline in pre-tax profit and a 5.9% fall in same-store sales. Gross margins also were down. But credit investors took encouragement from M&S’s decision to cut its dividend, its first such cut in nearly 10 years. Strength in M&S’s international division was well-received.
Vodafone was another notable tightening credit. The UK-based telecoms firm’s full year results, though hardly impressive, came alongside radical cost-cutting plans. The company said it will speed up its cost cutting efforts in the face of challenging conditions in western Europe. Vodafone’s spreads are now at their tightest levels since last September.
In the US, the credit rally was just as comprehensive. The Markit CDX IG index was trading at 144bp, 5bp (3%) tighter on the day. Tightening credits easily outnumbered those widened, with cyclical credits again outperforming.
Retailers were tighter following a couple of strong results. Upmarket department store chain Saks rallied after it posted a narrower loss than expected. Like other retailers that have surprised on the upside, the better than expected figures were due to cost-cutting and inventory control.
Home Depot continued to tighten after it posted first-quarter profits that beat expectations. The home improvement sector was one of the best performers yesterday following strong results from smaller retailer Lowe’s.