European credit markets fell back today as sovereign concerns weighed on spreads. There was no fresh news that triggered the widening, but it was no surprise that Greece was again capturing attention. The sovereign’s spreads hit a record wide of 495bp earlier today before settling back to around 475bp. The EU and IMF began negotiations with the Greek government today, and finance minster George Papconstantinou said it would take about 10 days for the parties to reach agreement on the term of the bailout package. Current market yields imply that it is a matter of when and not if the package will be activated, though some view it as inadequate in the medium-term. Technical factors also played a pert in the widening. Basis traders were taking advantage of the widening in bond spreads and buying protection. Profit taking saw CDS spreads come in slightly this afternoon.
A contagion effect saw the other peripherals widening, with Portugal again the most vulnerable. Its spreads were trading as wide as 235bp, close to the record 245bp wide reached in February. Spain, at 162bp, was also approaching its record wides of 172bp hit at the same data. The peripheral widening pushed the Markit SovX Western Europe to 100bp, and the index looks set to close at its widest level since the peak of the Greek panic on February 8.
The corporate credit indices opened tighter but soon gave back their gains. They have recovered slightly late afternoon, with the Markit iTraxx Europe index at 81.75bp (+0.5bp) and the Markit iTraxx Crossover at 413bp (+2). The widening among single names has been led by credits exposed to the peripheral economies, e.g. Portugal Telecom and Hellenic Telecom. Banks came under renewed pressure, new tax proposals from the IMF adding to the negative sentiment from the Goldman investigation. Spanish banks, in particular, were among the worst performers.
Airlines and travel groups saw only modest tightening today despite aviation restrictions being lifted. The disruption continued, and the International Air Transport Association put the cost of the five day airspace closure to airlines at $1.7 billion. BA’s spreads are trading at 415bp, 7bp tighter than yesterday but still nearly 50bp wider than pre-volcano levels.
Strong earnings from Apple helped the North American CDS markets withstand some of the widening pressures in Europe. The Markit CDX IG was flat around 86bp, while the stock markets were slightly up. Morgan Stanley‘s spreads were little changed at 140bp after it posted better than expected results, while Goldman Sachs was slightly wider at 125bp.
Markit’s Gavan Nolan wrote this CDS report