Bonds: financials hit as risk exposure in focus

The focus in European credit markets on Wednesday was firmly on financials, with corporate and high-yield spreads proving resilient in the face of a stock-market sell-off, as concerns persisted over exposure to risky instruments.
Trading was thin, however, due to the Assumption Day holiday in some parts of Europe, traders cautioned. The widely watched iTraxx Crossover moved in a fairly restrained 20-basis-point range and by 1420 GMT was just seven basis points wider versus late Tuesday at 357 basis points as equities markets pared losses.
"All eyes are really on the equity market. Credit is relatively quiet and relatively stable," said a trader. The iTraxx senior financials index underperformed, widening as much as 6.5 basis points to 52 basis points before recovering somewhat to 48.5 basis points by 1500 GMT, according to prices from Deutsche Bank.
"We've seen a wave of selling regarding financials," said a second trader, with German banks particularly hard hit, following renewed rises in the cost of default protection on US names such as mortgage lender Countrywide Financial Corp.
Analysts at J.P. Morgan noted the market's focus had shifted in recent days. "What seems to be of increasing concern to credit market participants is the exposure of the banking system to mark-to-market losses on structured products via conduit vehicles, and the extent to which these will act as a liquidity drain," they wrote in a note to clients.
But the analysts said concerns about a spillover of the liquidity drain to non-financials seemed misplaced as companies, particularly in the high-yield market, had spent the past 12 to 18 months refinancing debt opportunistically and had achieved better terms.
Also in financials, Icelandic bank Kaupthing was in the spotlight as it agreed to buy Dutch merchant bank NIBC - but not to take on its subprime debt portfolio, on which losses have built to 137 million euros. Moody's Investors Service said it might cut Kaupthing's Aa3 rating, while Fitch Ratings affirmed the bank's A rating.
Late in the session, Nestle, the world's largest food company, lost its triple-A rating from Fitch Ratings after announcing a $21 billion share buyback programme. Fitch cut the rating one notch to AA+ and said Nestle's management had said it was no longer wedded to a financial policy supporting its previous triple-A rating.
Five-year credit default swaps on Nestle were unchanged at 10.5 basis points, according to prices from Deutsche Bank. In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 62.4 basis points more than similarly dated government bonds at 1511 GMT, 0.8 basis points more on the day.