European credit spreads narrow

European credit spreads narrowed on Tuesday but the move was largely technical with little credit-specific news, an analyst said. By 1536 GMT, the investment-grade Markit iTraxx Europe index was at 92.75 basis points, according to data from Markit, 3.25 basis points tighter versus late on Monday.
The Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 548 basis points, 11 basis points tighter. Mehernosh Engineer, a credit strategist at BNP Paribas, said the move tighter was partly due to investors taking off a decompression trade. "We've got market technicals playing around. There is a better tone so people have taken some risk off," he said. The decompression trade in its simplest form involved avoiding weaker credits and holding stronger credits, Engineer said.
"You buy protection on the Crossover and sell protection on the Main, making the spread between the two widen. But people are now taking that trade off. We would need significant equity weakness for people to put that trade back on." One London-based trader said the actions held little immediate significance for debt investors, and that the focus was now on the bank's future: "It's definitely not over with UBS, and as long as they have that investment bank they have the same set of problems ... probably more."
Five-year credit default swaps on UBS senior debt were little changed at 102.5 basis points, and 175 on its subordinated debt, the trader said. Credit strategists at UniCredit (HVB) wrote in a note to clients: "This decision adds uncertainty regarding a future legal split of the bank, which could lead to the same scenario as at Dresdner, with investors unsure where their debt will end up.
UBS management signalled for the first time on Tuesday that it could ditch the investment bank although it said there were no plans now to do so. Across the Atlantic, a survey by the US Federal Reserve said late on Monday that, amid economic fragility, US banks were increasingly tightening their lending standards.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 118.5 basis points more than similarly dated government bonds, 1.2 basis points more on the day. In underlying government bond markets, the yield on the interest rate sensitive two-year Schatz was 4.083 percent, 1.5 basis points less on the day. The 10-year Bund yielded 4.245 percent, 2.1 basis points less. The 10-year euro swap rate was 4.725 percent.