CDS update: Spreads rally in strong start to week

This CDS report was written by Markit’s Gavan Nolan
European credit spreads rallied in a strong start to the week. The Markit iTraxx Europe Series 11 index tightened by over 9bp to trade around 162.5bp, while the Markit iTraxx HiVol 11 index did even better, tightening to 348bp, 25bp tighter on the day. The Markit iTraxx Crossover index was also 25bp tighter at 900bp, a percentage move in line with equities. The rally was broad-based, with few names widening.

Financial credits led the way after the US Treasury released details of its plan to restore confidence in the beleaguered sector. The plan will take up to $1,000 billion in distressed and illiquid assets off bank balance sheets and into a public-private investment programme. The Treasury will provide $75 billion to $100 billion in TARP funds, which will be joined with private capital and used as equity. FDIC and TALF funds will use the equity as a base to leverage. The plan is generous to the banks and is aimed at getting their full participation. Hopes that the scheme will be a success – troublesome issues in the minutiae aside – caused spreads to rally.

Auto credits enjoyed a strong session. German car maker Daimler was the catalyst for the rally after it announced that an Abu Dhabi fund is to buy over 9% of the firm for EUR1.95 billion. Aabar investments, a fund controlled by the sovereign, will be the firm’s biggest shareholder after the capital increase. Daimler is one of many car makers struggling to cope with the global economic downturn, and credit investors will welcome the injection of fresh capital.

Markit chart of carmakers CDS

US credits also rallied, though they underperformed strong stock markets. Financials dominated the session amid hopes that the Treasury plan will clean up bank balance sheets and remove the inertia affecting the sector. Tech credits also outperformed, with new Markit CDX IG names Cisco and Dell leading the way. The index itself was trading around 192bp, over 6bp tighter than yesterday’s close.

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