Credit spreads widen on data disappointments

European credit spreads widened on Tuesday after US core producer prices rose at twice the rate forecast, extending a downturn that began earlier in the day after an unexpected decline in German investor sentiment.
By 1520 GMT, the Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 418 basis points, according to data from Markit, 26 basis points wider versus late on Monday. The investment-grade Markit iTraxx Europe index was at 70.5 basis points, 7.5 basis points wider.
"It looks as if we have reached the turning point or are close to the turning point" in the credit market, from which spreads will start rising again to more realistic levels, said Jochen Felsenheimer, a credit strategist at UniCredit (HVB).
Core US producer prices, which strip out energy and food costs, increased by 0.4 percent in April, for a gain of 3 percent over the past 12 months, government data showed. In Europe, the ZEW economic research institute's gauge of German investor sentiment fell to minus 41.4 from minus 40.7 in April, worse than the consensus forecast for minus 37.5, weighed down by fears inflation and a strong euro will curtail growth.
The market was hit by both figures, and the risk is high of further data disappointments in coming weeks, Felsenheimer said. "The most likely source of uncertainty in credit will be more macroeconomic surprises," he said, pointing to US figures scheduled this week on mortgage applications, house prices and home sales.
Among individual names, credit default swaps on five-year debt of Deutsche Telekom widened by about 4 basis points to 79 basis points, according to Markit data. Late on Monday, Standard & Poor's downgraded the German phone company's credit rating by one notch to BBB+, and Moody's Investors Service cut its rating by one notch to Baa1.
S&P cited the company's purchase of a state in Greek telecoms company OTE. In the new issue market, mining company Xstrata set guidance at the tight end of its initial range for a three-part bond to raise 1.1 billion euros ($1.71 billion) and 500 million pounds ($976.9 million).