European corporate credit spreads rallied on Thursday, shrugging off strong US inflation data and concerns about higher interest rates, while BT starred in the primary market. The iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, tightened 5 basis points to 202 basis points by 1400 GMT, a trader said.
Extending a tentative rally that started earlier in the day despite strong US inflation data. But spreads are still more than 10 basis points wider than the 190 level they were stuck at almost two weeks ago.
May headline US producer price inflation rose more than expected, boosted by higher energy costs, although core prices were in line with median forecasts of a 0.2 percent increase. Credit and equity markets appeared to shrug off any concerns about possible higher borrowing costs which have knocked markets in recent days, with the Dow Jones industrial average up 71 points at 13,554 by 1450 GMT.
"The data implies that the US economy is growing slightly faster than people think and that it is more likely to overheat and rates should go up. But that said, a lot of that has been priced into the Treasury curve in the last week or so," the trader said.
There were few standouts among single name spreads in a very technical and macro-led trading session, although in the high-yield market, the cost of insuring ISS group debt against default fell sharply. The move came after the company's private equity owners EQT and Goldman Sachs Capital Partners said they were considering an IPO of the cleaning services giant within 12 months.
Five-year default swaps on FS Funding, the vehicle used to acquire ISS in the buyout, fell 25 basis points to 285 basis points, a second trader said, as proceeds from any IPO should be used to pay down debt. Five-year default swaps on ISS, the underlying company, fell 20 basis points to 145 basis points, the trader said.
British Telecommunications, part of BT Group Plc, was in the spotlight after it launched a 1.5 billion sterling equivalent bond. The bond issue, consisting of one euro and two sterling tranches, was almost four times oversubscribed and is BT's first since 2001. It comes after the company in May unveiled a 2.5 billion pound share buyback programme, boosting returns to shareholders.
Lafarge also made a swift journey through the market, pricing a 500 million euro 10-year bond at 53 basis points over mid-swaps, tighter than initial guidance.
Also in the telecoms sector, network firm Ericsson plans to issue a two-part euro bond to refinance existing debt and for general corporate purposes. The sale will comprise a benchmark 10-year euro fixed-rate bond and a smaller seven-year euro floating-rate note and will contain a change-of-control clause as has become commonplace in recent months.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 41.6 basis points more than similarly-dated government bonds at 1500 GMT, 0.1 basis points lower on the day.
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