Bonds: credit spreads tighten

European credit spreads continued to tighten on Thursday as global equities gained, with hybrid bonds of Germany's Suedzucker leading the way, lifted by positive earnings news. By 1513 GMT, the closely watched iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, tightened 12 basis points to 270 basis points, according to Markit data.
Since the start of October the index has tightened around 45 basis points. Meanwhile, the investment-grade iTraxx Europe index was at 28.5 basis points, having broken decisively through the 30-basis-point barrier that it had flirted with earlier in the week. One trader described the market as "quiet but squeeze."
The market moves contrasted with headlines that ratings agency Moody's Investors Service had downgraded some of the biggest homebuilders in the United States to "junk."
Moody's cut the ratings of Centex Corp, Lennar Corp and Pulte Homes, adding that it expects bleak housing industry conditions to linger until 2009. But that didn't deter markets, with US stocks rising to record highs. "It's a more positive environment today," said Puneet Sharma, a credit strategist at Barclays Capital.
"The Fed has cut rates, there are expectations that it will cut more, some markets which were closed earlier have opened up," Sharma said. "The markets are generally going ahead on hope."
He warned however that the generally optimistic consensus had not erased some nagging fundamental problems in the commercial paper and housing markets. "The speed of the recovery of spreads has been too rapid. The real issues have not necessarily gone away," Sharma said.
Suedzucker's hybrid bond was 65 basis points tighter at 290 basis points by 1449 GMT, according to Deutsche Bank prices, after the sugar maker said its earnings would not be affected by a European Union ruling on sugar quotas.
Analysts at Royal Bank of Scotland welcomed the news, saying: "We are using the opportunity to change our longstanding recommendation back to neutral, and move to overweight on the perp (hybrid bond)."
In primary markets, Dutch chemicals group DSM NV priced its 10-year 750 million euro ($1.07 billion) bond at the tight end of initial guidance, as it garnered an order book of 5.5 billion euros, a banker familiar with the sale said.
The bond priced at mid-swaps plus 68 basis points, down from an initial indication of around 70 basis points over mid-swaps, the latest in a string of new issues to come in tighter than initial guidance and attract strong demand.
Investors have been keen to snap up new issues as they have offered chunky premiums versus the illiquid secondary bond market and versus credit default swaps. DSM's 10-year credit default swaps were indicated at around 44 basis points, meaning the new deal offered a roughly 24-basis-point premium.