European credit markets nervous

European credit market spreads drifted wider on Monday as interbank lending rates hit nine-year highs and tension built ahead of a trading update from Royal Bank of Scotland and US jobs data later in the week.
By 1615 GMT, the iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 355 basis points, according to data from Markit, six basis points wider versus late on Friday.
The index had traded in a 351 to 358 basis point range for most of the day, drifting wider as US equities opened weaker. An initial move wider was sparked by concerns about the size of possible writedown at UK bank RBS, which is due to release a trading update on Thursday.
Markets were in also in a nervous mood, partly as a result of a downgrade by Moody's Investors Service late on Friday. Moody's downgraded or issued warnings on about $116 billion of debt issued by structured investment vehicles (SIVs), bank affiliates that raise short-term debt and buy long-term securities, including some linked to US subprime mortgages.
Nearly $65 billion involved SIVs sponsored by Citigroup Inc. "There is still some carry over from that report," said Puneet Sharma, a credit strategist at Barclays Capital. "But the other main worry is that money markets have tightened again."
London interbank offered rates for one-month sterling hit their highest since late 1998 on Monday as demand surged for funds covering the seasonally thin New Year period. One-month sterling Libor rates - average rates London-based banks lend to each other - rose to 6.7150 percent from Friday's 6.09125 percent. This compares with the Bank of England's benchmark interest rate of 5.75 percent.
On a brighter note, Warren Buffett's Berkshire Hathaway is paying $2.1 billion to buy TXU junk bonds from Goldman Sachs, CNBC reported on Monday. Buffett told CNBC that the bonds are the only junk bonds he is interested in at the moment, adding that some recent issues give new meaning to the word "junk."
"There are pockets of value, especially in high yield where some spreads will be completely out of line with what the default probability is," said Sharma.
The Financial Times reported that RBS could write down as much as 1.9 billion pounds ($3.9 billion) later this week while Sanford Bernstein analysts on Friday estimated the writedown at 1.6 billion to 1.9 billion pounds, which they termed "significant, but not cataclysmic". Interest rate announcements by the European Central Bank and Bank of England are also due on Thursday, with a risk the latter may cut rates.
On Monday, the Institute for Supply Management said its index of national factory activity edged down for the fifth straight month to its lowest level since January at 50.8 from 50.9 in October. The November employment index slipped to 47.8 from 52.0, to mark its lowest reading since September 2003. A reading of below 50 signals contraction, a concern ahead of non-farm payrolls for November due on Friday.
A negative jobs report could be enough to push the Federal Reserve to cut rates by 50 basis points on December 11 rather than a smaller-than-expected quarter percentage point move. "The Fed hasn't indicated that it will be that aggressive but the market is already taking one cut for granted. If the payroll number is significantly weak, then maybe you could get a more aggressive move," said Sharma.