European credit spreads surged wider on Wednesday to levels not seen since August, after the late-July peak in the credit market turmoil, led by financials as fears mounted about further writedowns and illiquidity. The iTraxx senior financials index hit a life high above 60 basis points in early trade, with the spread widening gaining momentum into the close.
The index was at 64.75 basis points by 1630 GMT, 8 basis points wider on the day. The subordinated financials index also touched a fresh high in late afternoon trading at 100 basis points, 13 basis points wider on the day. The sell-off was initially prompted by steep falls in stock prices as oil hit record highs just above $99 a barrel and the Federal Reserve slashed its US economic growth forecasts late on Tuesday. That stoked further fears about the health of the world's biggest economy and outlook for interest rates.
European shares were down more than 2 percent in afternoon trade while US stocks were 1 percent weaker. Other major credit default swap indexes also jumped sharply wider. The iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, rose above the psychological 400 basis point mark to a 3-1/2 month high. The Crossover was at 404 basis points, 19 wider on the day by 1630 GMT while the investment-grade iTraxx Europe index was at 64.5 basis points, more than double levels of around 30 basis points just five weeks ago.
ABX indexes - key derivatives indexes tied to subprime and commercial mortgages - have also sunk to all-time lows this week. Some fear that monoline insurer - specialist-bond insurers - will be next on the risk radar.
"I'm particularly concerned about the monoline situation but there are so many different aspects to concentrate on. The ABX keeps falling further and further, highlighting the fact there should be plenty more writedowns to come," said Jeroen van den Broek, a credit strategist at ING. The renewed credit turmoil and volatility led the European Covered Bond Council (ECBC) to suspend interbank market-making in covered bonds until Monday, November 26.
The move is a sign of the stress in the market for covered bonds - backed by pools of assets that remain on the borrower's balance sheet - which is dominated by German institutions that have almost a trillion euros of covered bonds outstanding. Ireland's AIB Mortgage Bank, a unit of Allied Irish Banks Plc, and Britain's Abbey National Treasury Services, parts of Spain's Santander have both postponed covered bond issues this week.
Van den Broek said the US Thanksgiving holiday on Thursday will give credit markets some breathing space, but predicts the Crossover could hit 450 basis points by the end of next week housing data due on the sinking US housing market likely to be key to sentiment.
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