- Sovereigns extend rally – Portugal (192bp, -42), Spain’s (144bp, -21), Greece (490bp, -40)
- UK (76bp, -9) performing well following formation of new government
- Banks resurgent after difficult session yesterday
European credit markets today continued where they left off yesterday and extended the recent rally. The euphoria following Monday’s bailout announcement has dissipated but some of the positive sentiment has lingered as contagion fears have receded. The credit market ignored a lacklustre start by equities but the rally gathered pace when the latter market accelerated upwards in the afternoon. The Markit iTraxx Europe index was 7bp tighter at 94.5bp, a full 47bp tighter than Friday’s close. However, this is still wider than April month-end levels and spreads have some way to go before they return to the sub-75bp levels seen in March.
Sovereigns put in another strong performance, the bailout and the ECB’s interventions dominating the market. The Markit iTraxx SovX Western Europe index closed at 106bp, off the tights seen earlier in the session but still 13bp tighter than yesterday’s close. The peripherals were driving the tightening, though most European sovereigns gained ground over the day. Portugal (192bp, -42) was one of the stronger names today after it successfully sold EUR1 billion in 10-year bonds. Post-bailout a fully subscribed auction was expected, and the sale had little impact on a market already tightening. Nonetheless, it added to positive sentiment. Spain‘s (144bp, -21) announcement of further austerity measures also supported sovereign spreads. Greece (490bp, -40) continued to grind tighter, though the momentum slowed in comparison to the other peripherals.
The UK‘s (76bp, -9) sovereign CDS spreads put in a solid performance, helped by the formation of a new government. The Conservative/LibDem coalition appeared to be the most likely combination to deliver a stable administration – the arithmetic . However, the two parties are very different in some areas, and the coalition is likely to come under pressure from both parties grass roots. Another election in the next two years is a strong possibility. But for now the new government has made firm noises on deficit reduction and that will go down well with the markets.
Banks made up the ground they lost yesterday and reaffirmed their relationship with sovereign spreads. The Markit iTraxx Senior Financials index was 13bp tighter at 124.5bp, with banks in the peripheral countries leading the way. Iberian banks, in particular, performed strongly after suffering a torrid time recently. Banco Espirito Santo, one of the country’s weaker banks, saw its spreads tighten 100bp today.
In North America the credit markets were not quite as ebullient, though they still extended their rally. The Markit CDX IG index was nearly 3bp tighter at 97.75bp, with widening credits scarce. Strong earnings, as well as the improving European sovereign situation, helped support spreads.
Markit’s Gavan Nolan wrote this CDS report