Corporate debt markets fall

European corporate debt markets fell on Wednesday, tracking declines in equities, as investors bet that spreads near record tight levels reflected too much optimism over the outlook for credit.
The iTraxx Crossover widened 10 basis points to 244 basis points, the biggest daily decline since the series launch on September 20, while the investment-grade iTraxx Europe index widened around 1.0 basis point to 24.375 basis points.
Equity markets on both sides of the Atlantic retreated on Wednesday from close to multi-year highs, as mixed earnings reports and unease over a shift to the political left after US mid-term elections dampened appetite for riskier securities.
"The Crossover (index) traded as wide as 246 basis points," said a trader in London. "There is no specific reason except that obviously we have had a strong rally."
Monthly investor polls by Citigroup and J.P. Morgan in recent days showed investors were the most positive toward credit for about two years, amid solid corporate earnings, low defaults and excitement about new structured credit products. The spread on the iTraxx Europe index has narrowed about 25 percent since early October to record tight levels, while the Crossover index spread narrowed about 18 percent.
Some analysts have speculated that anticipation of a wave of Constant Proportion Debt Obligations (CPDOs), which offer rated leveraged returns on index-based portfolios, has also boosted the market, though to date just two deals have been sold.
Bankers add leverage to the deals by selling protection on the iTraxx indexes. "The product hype is justified but what is overhyped is its impact on the market," said Richard Whittle, global head of credit and alternatives trading at ABN Amro.
Still, without a specific concrete threat to credit quality, it is difficult to envisage the current weakness will be anything but short lived, strategists said.
"After a very strong rally it's natural that we see a bit of a bounce," said Vivek Tawadey, head of credit portfolio strategy at BNP Paribas. "I don't think there is anything sinister underlying it - rather that we have come in very fast and with equities coming off multi-year highs it's natural that we consolidate."
In the utility sector, the cost of insuring debt of Scottish Power against default doubled, and its bonds fell, after the energy supplier said it had received a take-over approach.
Five-year credit default swaps on Scottish Power rose 28 basis points to 45 basis points by late afternoon, a trader said, meaning it costs 45,000 euros a year to insure 10 million euros of the utility's debt against default.
Renault also was in the spotlight after the company surprised markets by announcing a snap press conference for Thursday morning, leading to speculation over its motives.
Renault said that a statement it planned for Thursday would "not be bad news", an analyst who had spoken to the company told Reuters. "They would not give details but they said it would not be bad news," said Christophe Boulanger, an auto analyst at Dresdner Kleinwort. "There is some speculation they could announce the sale of their stake in Volvo."
Renault has a 20.7 percent stake in truck maker Volvo, the sale of which could raise about 4.5 billion euros ($5.75 billion), Boulanger said. Five-year credit default swaps on Renault traded as much 6 basis points wider after the announcement of the news conference, at 36.5 basis points.
Renault, the sister company to Japan's Nissan, which recently broke off three-way alliance talks with US General Motors Corp, said the news conference would start at 0700 GMT.
In a busy primary market, Veolia Environnement, WPP and Belgacom unveiled plans for new bonds, adding their name to a roster of prospective issuers that already includes OTE, Imperial Tobacco, and Carnival. Elsewhere, Canada's Bombardier detailed guidance on its planned 3-part, 1.8 billion euro high-yield bond sale, while KPN sold 1 billion euros of 10-year bonds as it bought back 732 million euros of shorter-dated debt.