Credit spreads recover

European credit markets recovered from an initial bout of severe spread widening on Wednesday, although liquidity remained poor and traders said there was relatively little activity. Better-than-expected US retail sales data gave US stocks a boost in afternoon trading and helped maintain the tightening bias in the European credit market.
Which early in the session had tested the record wide levels reached on Tuesday. The US Commerce Department said retail sales rose 0.3 percent, beating analysts' forecasts for a decline of 0.3 percent.
By 1545 GMT, the investment-grade Markit iTraxx Europe index was at 102 basis points, according to data from Markit, 1 basis point tighter on the day, having earlier traded above 110 basis points.
This is the first time the index has moved tighter on the day since February 1, when it ended at 78 basis points, according to Markit. It is currently 52 basis points wider than at the start of the year. The iTraxx Crossover index was at 548 basis points, 6 basis points tighter on the day, having traded as wide as 575 basis points.
"It's quite a decent rejection of the 575 level in the Crossover," said one trader. "It's making 575 look like a relatively firm top of the range ... for the moment." In a similar way, the Europe index has now pushed up to just over 110 basis points twice before rebounding.
Another trader put the tightening down to investors covering short positions to take profits after the recent sharp widening. "People are still reluctant to take on long positions," he said. "Everyone's licking their wounds and trying to find out where the next move will lead us," he said. "It's far from being over in my opinion." The market has been heavily focused on the credit derivatives indexes in recent days, with the Europe index in the limelight as it has come under severe pressure due to a feared unwinding of complex structured credit products.
But Wednesday also saw some - albeit limited - interest in single name credits, the first trader said. He said there had been some buying in high-yield credits that have seen steep price falls in recent sessions: papermaker M-Real, semiconductor firm NXP, chemicals company Cognis and cable operator Ono.
European high-yield bonds have fallen sharply since the start of the year, with some credits trading as if they are distressed even if operationally investors say they have few concerns.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 120.4 basis points more than similarly dated government bonds at 1604 GMT, 1.0 basis points more on the day.