European credit spreads were tighter on Tuesday in a brighter mood ahead of an expected US interest rate cut and increased confidence as banks work out problems with structured investment vehicles (SIVs).
The US Federal Reserve is expected to cut rates by a quarter-percentage point, or perhaps more, from 4.5 percent, to strengthen the economy against a credit crunch and housing slump. The decision is due at 1915 GMT.
By 1615 GMT, the iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 335 basis points, according to data from Markit, 6 basis points tighter versus late on Monday. The Crossover index has not hit such low levels since November 1, the day after the Fed's last interest rate decision when it cut rates by 25 basis points.
The investment-grade iTraxx Europe index was at 51.25 basis points, 1.75 basis points tighter. "We've given a little bit back but we're still tighter," said Suki Mann, a credit strategist at SG CIB. "The mood is quite upbeat, everyone is pretty much expecting a Fed cut of 25 basis points and perhaps up to a 50 basis points cut in the discount rate."
A reduction in the discount rate - the amount the Fed charges for direct loans to banks - might help ease liquidity problems within the financial sector. "The general news flow has also been a bit more positive with the equity injections in SIVs. There was a better tone at the open today," added Mann.
A growing number of banks in recent weeks have announced plans to try to help SIVs survive the credit market turmoil. Citigroup has the size of its SIV by more than $15 billion in the past two months, the Financial Times said on Tuesday.
UBS was in the spotlight again on Tuesday, just a day after the Swiss bank announced writedowns on subprime mortgage exposures and a capital injection from the Government of Singapore Investment Corporation and an unnamed Middle East investor to bolster its sagging balance sheet.
UBS CEO Marcel Rohner said that the bank was now protected against all scenarios and would not have to hike capital again after a large capital injection. The statement gave a lift to sentiment and supported financials' credit spreads.
In an otherwise quiet market, bid speculation pushed the cost of insuring Swiss specialty chemicals group Clariant's debt against default higher. Five-year credit default swaps on Clariant were 15 basis points wider at 98 basis points, according to Deutsche Bank prices, on bid rumours, traders said.
Clariant was the subject of take-over speculation back in May, with talk it might be a target for Germany's Lanxess. Five-year CDS on Lanxess were also 15 basis points wider at 82.5 basis points. The Swiss speciality chemicals group said on Tuesday it was likely that it would divest unattractive businesses following a review of its portfolio, the conclusions of which it will announce in the first quarter. The comments were made in a slide presentation prepared for a conference starting Wednesday.
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