Credit spreads widen

European credit spreads drifted wider on Friday in reaction to a sharp tightening early in the week, shrugging off mostly benign economic data that gave a small boost to US stocks. By 1628 GMT, the Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 556.5 basis points, according to data from Markit, 10.5 basis points wider versus late on Thursday.
The investment-grade Markit iTraxx Europe index was at 116.5 basis points, 3.5 basis points wider. On Tuesday spreads had screamed tighter, with the Crossover gapping in by more than 60 basis points to 531 basis points. For the rest of the week, with the approach of the end of the first quarter, spreads have traded in a range, with the index between about 530 and 560 basis points.
"There are no major fundamental or technical factors pushing spreads wider. This is more of a normal reaction to the massive tightening in the past few days," said Andrea Cicione, a credit strategist with BNP Paribas. US economic data claimed centre stage. The personal consumption expenditure price index, a measure of inflation, rose 0.1 percent in February, in line with expectations.
Personal income rose by a greater-than-expected 0.5 percent in February versus a forecast of 0.3 percent. The numbers gave support to the US Federal Reserve's decision to take strong measures to bolster a weakening economy rather than to focus on controlling inflation.
The main negative figure for the day was that US consumer confidence weakened to its lowest level in 16 years in March in a Reuters/University of Michigan survey and came below analysts' expectations.
"It is further confirmation that the US economy is going to slow, showing that the consumer is feeling increasingly shaky," Cicione said. Consumers account for about 70 percent of the US economy, and much of the growth in recent years has been fuelled by an increase in consumer debt, he said. In Europe, two corporate credits were hit by significant downgrade warnings.
Standard & Poor's said it might cut the ratings for Kingfisher, the region's biggest home improvements retailer, to junk from the lowest investment-grade level, citing "an aggressive financial profile" and difficult trading conditions.
Moody's Investors Service also cut its outlook for Kingfisher's rating, also at the lowest investment grade, to negative, warning that the retailer would be hurt by a slowdown in British consumer spending.
Five-year credit default swaps were at 420 basis points, a trader said. That was wider by 22 basis points from 403 basis points on Thursday, according to Markit data. Stora Enso also was hit by a Moody's warning that it could downgrade the Finnish paper company one notch to junk. The agency said that economic pressures and industry trends could hurt the company's operating performance.
Five-year CDS on Stora's debt widened to 430 basis points, another trader said. That was about 36 basis points wider versus about 395 basis points on Thursday, according to Markit data. Both companies are components of the Crossover index.