Credit spreads widen

European credit spreads widened on Wednesday as investors fretted about US bond insurers and possible downgrades to their credit ratings. Fitch Ratings said on Tuesday it may cut the top-notch AAA rating of MBIA's insurance unit, and that bond insurers in general are likely to face larger losses than previously expected, which could lead to more downgrades.
By 1600 GMT, the Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credit default swaps, was at 513 basis points, according to Markit data, 9 basis points wider versus late on Tuesday. It had moved as wide as 523 basis points.
The investment-grade iTraxx Europe index flirted with record highs, widening 3.75 basis points to 90 basis points. But there was little sign of the panic that gripped markets at the height of the credit turmoil last summer, when indexes were at similar levels, and more recently when the Crossover hit life highs around 530 basis points. Traders said volumes were thin.
"It's fragile but not disastrous," a credit trader said. "The last time the Crossover went above 500 basis points, a lot of people (who invest in cash bonds) panicked. But it is more orderly now, it doesn't feel as bad as it did last time."
However, any more bad news about the monolines could change that, he said. A second trader said a recovery in global stocks, after they plunged steeply on Tuesday, had led some investors to sell credit index protection, capping the move wider.
The cost of insuring SAS's debt against default soared after the Scandinavian airline posted a fourth-quarter loss. SAS cited problems with its Dash 8 Q400 planes and said it faced delays in turnaround plans and a worsening economic situation. Five-year credit default swaps on SAS widened about 60 basis points to 510 basis points, the trader said. That means it costs 510,000 euros a year to insure 10 million euros of the company's debt against default.
And 5-year CDS on world number-two truck maker Volvo rose about 8 basis points to 92 basis points, the trader said, after Volvo posted a smaller-than-expected rise in fourth-quarter pretax profit.