Credit spreads tighten

European credit spreads tightened on Friday, tracking gains in equity markets, as a dearth of negative headlines led short-sellers to cover their positions, while Colt Telecom took the lead amid merger talk.
By 0935 GMT, the iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 352 basis points, according to data from Markit, 9 basis points tighter than late on Thursday.
"The tone in the credit market by and large remains negative," said Geraud Charpin, a credit strategist at UBS. The cost of insuring debt of Britain's Colt Telecom against default fell sharply after a newspaper cited speculation that major shareholder Fidelity Ining to persuade AT&T to buy the company for 300 pence a share.
The Guardian newspaper, in its markets column, cited talk that AT&T was believed to have offered 240p to 250p a share for the company. Five-year credit default swaps on Colt tightened as much as 120 basis points to 220 basis points, according to Deutsche Bank prices, and pared the rally to be at 285 basis points after the company said it knew of no reason for the jump in the share price. Colt shares jumped as much as 35 percent.
The investment-grade iTraxx Europe index was at 53.25 basis points, about 2 basis points narrower. The FTSEurofirst 300 share index was up 0.66 after gains overnight in US stock markets, with the help of US Federal Reserve Chairman Ben Bernanke, who signalled an openness to interest rate cuts late on Thursday.
The iTraxx five-year senior financials index was at about 52 basis points, 2 basis points narrower, traders said. Deutsche Bank analyst Jim Reid wrote in a note to investors that, looking forward to 2008, financials are relatively cheap.
The Crossover index is trading at less than seven times the spreads of the financial senior index, which compares with a pre-crisis ratio of 29 times in June, he wrote. In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 94.0 basis points more than similarly dated government bonds, 1.3 basis points less on the day.
In underlying government bond markets, the yield on the interest rate sensitive two-year Schatz was 3.754 percent, 2.3 basis points up on the day. The 10-year Bund yielded 4.094 percent, 0.4 basis points more. The 10-year euro swap rate was 4.555 percent.