French bank BNP Paribas triggered a sell-off in European credit markets on Thursday when it announced it was freezing three asset-backed securities funds, deflating an early burst of optimism.
By 1500 GMT, the iTraxx Crossover index was at 347 basis points, 12 basis points wider versus late Wednesday, a trader said, but had traded as wide as 365 basis points an hour before. "We're up and down all the time ... with headlines saying we're affected, or we're not affected by subprime," the trader said. The day had got off to a good start however, with the Crossover moving as low as 308 basis points, 27 basis points tighter.
"Before BNP came out, you would have thought we'd been dreaming about the volatility we've had," said Gary Jenkins, a partner at credit-focused hedge fund Synapse Investment Management. "It was twenty to seven and I thought we were heading to 300 (on Crossover)."
BNP Paribas, France's biggest listed bank, rocked confidence after it said it had frozen 1.6 billion euros in three of its funds, citing US subprime mortgage sector problems.
BNP Paribas Investment Partners said the decision to suspend redemption's affected its Parvest Dynamic ABS, BNP Paribas ABS Euribor and BNP Paribas ABS Eonia funds, and said some parts of the US securitisation market had seen a "complete evaporation of liquidity".
It was downhill from there. In a quick tender, the European Central Bank was forced to inject extra funds into the system as banks scrambled for cash amid deepening concern about credit market losses and creating further jitters in markets. "The ECB said how much do you need, it's here, come and get it at your price. On the one hand that should give us confidence that they don't think there is a crisis but on the other hand scares us like anything as clearly there is a problem or they wouldn't do it," Jenkins said.
There was also confusion over a meeting held by the Bundesbank to discuss the rescue package for Germany's IKB. The bank denied market talk that the meeting was to focus on possible problems at state bank WestLB.
WestLB later disclosed that it had risky investments in subprime assets, making investors nervous that more casualties lay ahead, although it insisted that it could not be compared with IKB. Thursday saw the widest trading range on the Crossover index in a week. "It's all over the place," said one dealer. "It's moving 10 basis points every 10 minutes."
Prior to Thursday's jolt wider, a sense of calm had re-emerged in credit markets following wild swings in the Crossover index last week in unprecedented daily moves of near 100 basis points. The index now stands about 140 basis points below life highs above 500 reached just over a week ago. "Clearly we're going to remain fragile for a decent while yet. The next big question is whether all this will impinge on the broader US economy. Then we have got a problem," Jenkins said.
The primary market also showed fresh signs of life, giving another early morning sentiment boost, following weeks of virtually no activity, as GE Capital European Funding marketed a 3-year 500 million euro bond.
The bond which is guaranteed by GE Capital Corp, the finance arm of General Electric, was priced at mid-swaps plus 9 basis points, in line with guidance, to yield 4.625 percent.
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