The iTraxx Crossover index widened late on Friday as concerns about rising interest rates and the risky US subprime mortgage market continued to hurt sentiment. The index, made up of 50 mostly "junk"-credits, widened 2 basis points to 214 basis points by 1530 GMT, a trader said. "We're probably going to trade close to around that level," the trader said.
Corporate credit spreads have taken a hit this week, see-sawing from below 200 basis points to almost 220 on Thursday. Investor concern has centred on two troubled Bear Stearns hedge funds that lost billions of dollars from bad debts on securities backed by sub-prime mortgages. Merrill Lynch seized some $850 million of collateral from the funds, while other banks unwound their investments in Bear Stearns.
Inflationary concerns were also revived on Friday, as European Central Bank President Jean-Claude Trichet made hawkish comments in defence of the ECB's analysis of eurozone money growth, which has been rising faster than the bank's benchmark and could prove inflationary.
Investors are also nervous ahead of next Thursday's US Federal Reserve policy meeting, though Wall Street widely expects rates to remain unchanged at 5.25 percent. In retail, several single names saw a rise in five-year credit default swaps amid worries that rising interest rates would hurt consumer spending. CDS on Safeway Inc widened 4 basis points, Experian 3 basis points and Alliance Boot's 10 basis points.
"The retail sector is taking a bit of a kicking," a second trader said. "People are getting worried about interest rates ... Fixed costs are going up, and their environment is not looking good." "Those names are also LBO candidates," the trader added.
CDS on Pearson rose 1.5 basis points to 48 basis points, a third trader said, erasing earlier gains made after the publisher and General Electric Co said they had dropped their joint bid for Dow Jones & Co Inc.
The primary market was largely silent, a trend in corporates broken only by the pricing of Swiss packaging group SIG's two-part high-yield euro bond. Pricing was in line with initial guidance, though the size of both the 480 million and 420 million euro notes were higher than initially proposed.
Arcelor Finance ended its European roadshow on Friday and may give guidance on its two-part euro benchmark bond next week. The Carphone Warehouse Group Plc, the British independent mobile retailer and telecoms provider, will also be marketing a 10-year benchmark bond in sterling.
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