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European credit spreads touched record wides on Thursday on a combination of fears about corporate earnings, a slowdown in emerging markets growth and newly hedged positions on structured credit products.
By 1547 GMT, the investment-grade Markit iTraxx Europe index was at 161 basis points, according to data from Markit, 9 basis points wider than late on Wednesday, after revisiting a record wide of 166 basis points. The Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 813 basis points, 18 basis points wider after hitting a fresh record wide close to 820 basis points.
The index has hit a series of records in the past two weeks, taking it more than 250 basis points wider from around 566 basis points on October 1. "We've just had a plethora of negative headlines, this constant flow of bad news," said Suki Mann, a credit strategist at SG CIB. "The repricing of risk has been nothing short of savage," he added.
He noted that credit derivative spreads on Swiss commodities firm Glencore International, a component of the iTraxx Europe index, widened to a bid-offer spread of 1100-1300 basis points "on no newsflow". FCE Bank, a British-based financing unit of US automaker Ford, joined the list of names on the Crossover index trading upfront, taking the total number to 12 from seven this week.
Italian carmaker Fiat saw its debt protection costs jump sharply higher after it gave a bleak outlook for 2009. Five-year credit default swaps on Fiat were about 140 basis points wider at 992 basis points, a trader said, but one analyst said the move looked overdone.
Fiat is rated BBB- by both Standard & Poor's and Fitch ratings and Baa3 by Moody's Investors Service, the lowest investment-grade notches.A concern that it could move back to "junk" status, after only recently being upgraded to investment-grade, may have weighed on its spreads. "The results were pretty good on the whole given the sector context.
Daimler came out with a profit warning and Fiat confirmed full-year guidance," said one credit analyst. Andrea Cicione, a credit strategist at BNP Paribas, said that in addition to earnings and recession fears, credit spreads were also pressured by a reassessment of recovery rates on collaterised debt obligations (CDOs) by structured credit desks.
The impact of that has led to some unwinding of CDOs, or alternatively, hedging of positions by buying protection on the investment-grade Europe index, which has helped push that index wider.

Copyright Reuters, 2008

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