European credit markets held steady on Tuesday, shrugging off a rise in equity markets and with activity remaining thin despite the return of US markets after the Labour Day weekend.
The market broadly remains in wait-and-see mode, eyeing a range of risks including further disclosures of further US subprime mortgage exposure, the potential for new bond supply and the possibility of further central bank action.
"The market's slightly better bid, slightly more active," said one trader. By 1425 GMT, the closely watched iTraxx Crossover index was marginally tighter on the day at 329 basis points, having initially pushed wider to around 335 basis points.
Equities rose in European afternoon trading as the US Institute for Supply Management index of factory activity showed expansion in August, although at a slower pace than in July.
"The equity markets continue to be incredibly resilient. That's probably the biggest glimmer of hope the market's got at the moment," the trader said. He said there was continued action in some high-yield issuers that may be candidates for membership of the Series 8 Crossover index, to be launched on September 20. "There's a little bid of jockeying ahead of that."
Jim Reid, a credit strategist at Deutsche Bank, said it might take some time for credit markets to find a clear direction, noting that in the last two weeks the Crossover had closed in a tight range between 325 and 341 basis points. "I think there are three big events this month. There's clearly the Fed. There's clearly how the market handles supply and the third thing is US broker earnings," he said.
"I don't think we're going to get a full steer into the month until the broker earnings are out from the third week on," Reid said. In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 71.5 basis points more than similarly dated government bonds at 1523 GMT, 0.6 basis points more on the day.
The primary market saw activity from financial borrowers, while industrials remained silent. British bank HBOS sold a 2.0 billion euro 3-year covered bond, pricing the deal at 5 basis points over mid-swaps. ABN Amro, Danske Bank, Deutsche Bank and SG CIB managed the sale. And BNP Paribas tapped the market with self-led 10-year subordinated offerings in both euros and sterling, raising a total of 1.44 billion euros equivalent.
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