Bonds: Itraxx index tightens

Europe's Itraxx Crossover index tightened sharply on Friday, with spreads falling the most in one day since the current series was introduced to hit record tight levels, traders said. The index, made up largely of high-yield credits, tightened 10 basis points to 228, bringing the move for the week to around 21 basis points.
"It's just completely crazy," one trader said. "This is the strongest tightening we've had. I think this is the last time they're going to try and push it tighter. Everyone's fed up." The tightening reflects the falling cost of insuring European corporate debt against default.
"We do not think that credit fundamentals justify the last leg of tightening we have seen in CDS indices," Dresdner Kleinwort Wasserstein analysts wrote in a note to clients. "We believe that the rally in the credit markets shows signs of complacency, and of technically-driven yield-grabbing."
Elsewhere, the cost of credit default protection on Finland's Metso fell after the company reported stronger than expected first quarter profits.
Metso's January to March operating profit rose 73 percent to 95.4 million euros from a year earlier, exceeding all expectations in a Reuters poll of analysts.
Five-year credit default swaps on Metso tightened 15 basis points, to be bid at 70 basis points, another trader said. "This shows how the market is in general. Marginally positive news creates a tightening. Even negative news doesn't seem to push spreads wider," he said.
Five-year default swaps on retailer Ahold fell 8 basis points, to be bid at 115 basis points, a third trader said. "In my view there is no specific news driving the tightening, but there is a general tightening in the Crossover index," he said.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 45.5 basis points more than similarly-dated government bonds, 0.6 basis point less on the day.
This week saw heavy supply in the high-yield market, with bonds sold to back the leveraged buyouts of Danish cleaning group ISS and telecoms operator TDC.
ISS sold a two-part 1.3 billion euro bond on Friday, increased from an original planned 975 million euros. It sold a 450 million euro fixed-rate note, and a 850 million euro 10-year floating rate note (FRN).
The FRN has no non-call period, an unusual structure which market participants say reflects excess liquidity in the market.
"If there was ever a bellwether indicator that the market is overheated and will buy anything, a non-asset based, highly leveraged company and a bond with no call-protection is it," said a market source away from the deal.
Despite the aggressive structure and pricing, the deal traded up on its secondary market break with the fixed-rate notes quoted at 99.25/99.5 and the floating-rate notes at 101.75/102.125, traders said.