This CDS report was written by Markit’s Gavan Nolan
European credit markets experienced a mixed session today as investors tried to digest contrasting news flows. The sharp rise in US Treasury yields yesterday weighed on spreads this morning. This week has seen a massive auction of Treasuries, the proceeds of which will be used to fund the government’s growing deficit. S&P’s action on the UK last week, when the agency placed the government’s debt on negative outlook, triggered concerns that the US could be next. Rising long-term yields have ensued, a problematic development for an economy still in recession. The government will hope that quantitative easing will limit the damage
US sovereign CDS widened today, as did most of the CDS in western European countries. However, fears were assuaged in the broader market this afternoon as yields on the 2-year notes and 10-year bonds fell back.
The Markit iTraxx Europe index ended the day over 2% wider at 125bp, but the Markit iTraxx HiVol was just under 2% tighter at 241bp. The Markit iTraxx Crossover index was more or less flat, outperforming weak stock markets. A better than expected eurozone economic sentiment helped support spreads, though a survey showing expectations of deflation tempered any gains.
Banks were among the worst performers, led by Italian institutions. But UK banks were relatively resilient after the FSA released details of its stress test methodology. The regulator said it is assuming a peak-to-trough fall in GDP of 6%, an unemployment rate of 12%, a peak-to-trough fall in house prices of 50% and commercial property prices falling 60%. Investors took some reassurance that banks were adequately capitalised in this scenario, though the assumptions are not as severe as some of the most pessimistic outlooks.
n the US, spreads stabilised after widening yesterday. Positive economic news in the form of better than expected durable goods orders and unemployment figures helped sentiment, and tightening credits outnumbered those that widened.
The auto industry provided the highlight of the day with Visteon filing for Chapter 11 bankruptcy protection. It came as no great surprise to credit investors – the auto parts supplier has been trading upfront for nearly two years, and at severely distressed levels since the latter half of 2008. Its former parent Ford will provide DIP financing. GM‘s equivalent parts firm, Delphi, filed back in 2005. Visteon is a constituent of the current Markit CDX HY index and has been a member of various off-the-run indices. Details of indices affected and credit event auctions will be announced here in due course.
Time Warner was one of the day’s worst performers after it confirmed plans to separate its AOL division. The demerger, though coming sooner than many thought, was expected and the spread widening was moderate. The TW/AOL merger in 2000 was emblematic of the dot com era and its excessive valuations.
