Credit spreads remain firm

European credit spreads moved sharply tighter on Friday, with the iTraxx indexes trading close to contract lows, as global equities rallied thanks to reassuring first-quarter earnings reports.
Even though Citigroup, the largest US bank, saw its credit ratings come under pressure after a bigger-than-expected $5.1 billion loss, investors seemed to take heart that the biggest financial firms are putting the credit crisis behind them by taking write-offs and slashing costs.
As a result, credit markets were buoyant, with spreads sharply tighter on the week, helped by strong earnings from high-profile companies like Google, International Business Machines, Honeywell International and Caterpillar Inc. By 1540 GMT, the Markit investment-grade iTraxx Europe index was at 81.5 basis points, according to Markit data, 7.5 basis points tighter versus late on Thursday, close to a record low for the contract and around 23 basis points tighter than last Friday.
The iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was 33 basis points tighter at 463 basis points, around 63 basis points tighter than last Friday. "Earnings season has been pretty decent, it hasn't been the killer that many people thought it would be, and it's supporting valuations," said Suki Mann, credit strategist at SG CIB. However, there may be a more subtle effect on sentiment as the outlook for the near future remains dim, he said.
Among single names, the cost of insuring debt of the Royal Bank of Scotland fell sharply as an industry source said it was set to raise cash from its shareholders next week. Five-year CDS on RBS fell 6 basis points to 74.5 basis points, according to data from Markit.
Irish building materials group CRH Plc issued a 250 million pound 7-year bond, which was priced to yield 365 basis points over Gilts via Barclays, BNP Paribas, RBS and UBS. The borrower had initially given a mandate for a bond sale last June, but the deal never emerged at that time as the credit crisis bit.
The sale rounds out a week that has seen continued appetite on the part of corporate borrowers to tap the market, with recent sales having been well received. In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 121.9 basis points more than similarly dated government bonds, 2.4 basis points less on the day.