Credit rally halts as worries, shorts re-emerge

This week's rally in European credit spreads ground to a halt on Wednesday, as fresh fears over writedowns and the economy combined with investors adopting new short positions to push credit indexes slightly wider.
By 1700 GMT, the Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 546 basis points, according to Markit data, 10 basis points wider than late on Tuesday.
The investment-grade iTraxx Europe index was 1 basis point wider at around 103.75 basis points. Compared with recent moves, those changes are relatively restrained. Only a week ago the Europe index soared to record highs of 136.5 basis points.
"We're probably just giving back some of the tightening," said an analyst who declined to be named. "There isn't really a firm reason for the widening other than the usual bits and pieces of generally bearish chat." A London-based trader added: "It's difficult to see any clear direction with dealers and market makers extremely nervous and twitchy."
Record high oil prices, a nose-diving dollar and disappointing durable goods also fed some of the widening, but with a negligible consequences. "Those factors are fairly well-flagged ... I haven't seen them have a marked impact on the indexes," said the analyst.
The threat of downgrades to major bond insurers appeared to have been lifted on Tuesday after Moody's Investors Service affirmed the triple-A rating of MBIA. With Standard & Poor's removing MBIA from Credit Watch Negative on Monday, markets now await Fitch Ratings' decision on the bond insurer. Five-year credit default swaps on MBIA were 10 basis points wider at 365 basis points, according to Societe Generale.
Elsewhere, the cost of insuring the debt of British mortgage bank HBOS against default rose sharply after it said higher funding costs hit its margins last year and both financial and housing markets were set to stay tough, hammering its stock price. Five-year CDS on HBOS widened around 14 basis points to 120 basis points, according to data from Markit.
Elsewhere, five-year credit default swaps on Telekom Austria were two basis points wider at 109 basis points, a trader said, after it posted a lower-than-expected increase in quarterly earnings.