Credit spreads helped by stocks, payrolls in focus

European credit spreads tightened on Friday, buoyed by US and European stocks and adding to a strong 3-day rally, but trading was subdued ahead of key US employment figures. "We've seen a turnaround in views that we're not falling off a cliff, which is what we thought a couple of weeks ago," a trader said.
The Markit investment-grade iTraxx Europe index was at 90.75 basis points, according to Markit data, 4.75 basis points tighter versus late on Thursday and more than 25 basis points narrower than at Monday's open.
The iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was 21 basis points tighter at 484 basis points. The FTSEurofirst 300 index of top European shares rose 0.28 percent. But both traders and strategists warned the credit rally could be short-lived, and noted that volumes were thin.
"We think the next shockwaves to the system are just around the corner and the current spread levels in synthetics have been driven by technical forces rather than by strategic buying," credit strategists at UBS wrote in a note to clients.
The cost of insuring EDF's debt against default rose after La Tribune newspaper said the French electricity company's board had approved the launch of a take-over bid for British Energy.
Five-year credit default swaps on EDF widened around 4 basis points to 54.5 basis points, another trader said, Elsewhere, 5-year CDS on Norwegian papermaker Norske Skog were little changed at about 830 basis points, a third trader said, after its chief financial officer wrote in a letter to a newspaper that the company had comfortable liquidity, rejecting an analyst's view that it was "technically bankrupt".
A week filled with economic data will climax with US non-farm payrolls at 1230 GMT, a key gauge of the state of the US economy. Economists expect an overall drop of about 60,000 jobs for March, against 63,000 jobs lost in February.
The first trader said the credit market's response could be muted. "It would be hard to see a massive surprise outside the range of expectations." In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 132.1 basis points more than similarly dated government bonds, 4.0 basis points less on the day.