This CDS report was written by Markit’s Gavan Nolan
European credit indices widened today, driven by events across the Atlantic. The Markit iTraxx Europe index was trading around 107.5bp, about 3bp wider than yesterday’s close, while the Markit iTraxx Crossover index was 11bp wider at 683bp. Both lagged their equity counterparts, a reversal of the outperformance of credit vs. equity evident in recent weeks. Investors have been concerned about rising US Treasury yields. An auction of 10-year US Treasury notes yesterday was met with a lacklustre response, and raised fears that today’s $11 billion 30-year auction will go the same way. Yields on both maturities continued to rise today, and the outcome of the auction will drive spread direction.
There are a number of factors influencing the Treasury curve, not least inflation expectations. The price of oil breached the $72 a barrel level today, feeding fears that higher commodity prices could reignite inflation. A persistent slide in the value of dollar has contributed to the rising oil price. UK and US sovereign CDS spreads both widened significantly, indicating that the precarious state of the two countries’ finances is also a factor in rising government bond yields.
A solid opening by the US stock market helped limit the damage. Retail sales rose by 0.5% in May, reversing two consecutive months of declines. The figure was in line with expectations but most of the rise was due to a 3.6% rise in gas station sales. Sales excluding autos rose by 0.5%, higher than the 0.2% consensus forecast. The Markit CDX IG index tightened slightly to 124.5bp. US banks, unlike their European counterparts, were among the best performing credits again.