Credit spreads sharply firmer

European credit spreads tightened sharply on Tuesday after better-than-expected data on US factory activity added to increasing hopes that banks will be able to cope with losses from the credit crisis.
By 1621 GMT, the Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 535 basis points, according to data from Markit, 38 basis points tighter versus late on Monday. The investment-grade Markit iTraxx Europe index was at 109.25 basis points, about 11 basis points tighter.
UBS announced a writedown of $19 billion for the first quarter and Deutsche Bank of nearly $4 billion. The Swiss bank also said it was seeking to raise 15 billion francs ($15 billion) in a rights issue to shore up its balance sheet.
Meanwhile, Lehman Brothers Holdings raised $4 billion of capital in a convertible preferred share sale that answered questions about the investment bank's stability. "It is a positive that banks are able to raise capital," said Puneet Sharma, a credit strategist at Barclays Capital. "The financials had been beaten down too much. There comes a point when you say, 'Enough is enough. These risks are priced in'."
Banks have also benefited in recent weeks from strong measures by the US Federal Reserve to provide liquidity to the financial system and support the rescue of Bear Stearns. Five-year credit default swaps on senior UBS debt narrowed by 30 basis points to about 112 basis points, according to data from Markit. Five-year CDS on senior Deutsche Bank debt tightened by about 6.5 basis points to about 90 basis points.
In other credit news, Fitch warned it may cut the ratings of Iceland's three largest banks, Glitnir, Kaupthing and Landsbanki, citing increased risk of liquidity calls.
The agency later also lowered its rating outlook to negative on the country's A+ long-term foreign currency rating. Standard & Poor's also said it was reviewing Iceland's A+ rating, pointing to a lack of clarity on the government's strategy to address the funding pressures mounting on the three banks. Traders said the reaction of the banks' CDS was muted, with five-year CDS for Kaupthing and Glitnir already trading above 1,000 basis points. "There will be an impact on the market if these banks default," but the ratings outlook changes on Tuesday did not add much to the picture, Sharma said.