Credit spreads edge tighter

European credit spreads inched tighter on Tuesday, helped by reassuring results from Goldman Sachs, buoyant equity markets and moderate US core producer price index data. By 1515 GMT, the Markit investment-grade iTraxx Europe index was at 79.75 basis points, according to Markit data, 1.25 basis points tighter versus late on Monday.
The iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was 4 basis points tighter at 454 basis points. US producer prices rose by a larger than expected 1.4 percent in May due to a jump in energy prices, but core inflation moderated as forecast, government data showed on Tuesday. But in Britain, inflation rose in May to 3.3 percent, meaning Bank of England Governor Mervyn King had to write a letter of explanation to the government as to why it was so far above the 2 percent target.
"I think (inflation) is the main problem now, and will remain so until the end of the year at least," said a trader. "All the interest-rate speculation is based on the inflation problem. That's what the market is playing at the moment."
This has the potential to lead to exaggerated movements during the summer, when secondary liquidity traditionally declines, he said. Among single names, five-year credit default swaps on British housebuilder Taylor Wimpey were little changed after the company was downgraded two notches to a "junk" status BB+ by Fitch Ratings.
The CDS were indicated at 455 basis points on Tuesday, according to data from Markit, a similar level to the Crossover index. Fitch said falling UK home sales and contracting mortgage lending meant Taylor Wimpey's earnings would suffer for at least two years.
The agency warned that it could cut the ratings again - and by more than one notch - and that Taylor Wimpey potentially faced problems complying with its debt covenants.
Elswehere, CDS on Goldman Sachs tightened after the investment bank reported stronger-than-expected earnings. Five-year swaps fell 12 basis points to 100 basis points, according to data from Phoenix Partners Group. French construction to telecoms group Bouygues kept the primary corporate debt market rolling on Tuesday with a 1 billion euro 7-year bond sale.
The bond was priced at 120 basis points over mid-swaps, in line with guidance. IFR said orders had reached 3.2 billion euros. In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 111.7 basis points more than similarly dated government bonds, 1.1 basis points more on the day.