Credit spreads rally crippled

The rally in European credit spreads halted on Tuesday as investors looked ahead to potential risks posed by US economic data and a Federal Reserve interest rate decision set for later this week. By 1619 GMT, the investment-grade Markit iTraxx Europe index was at 74.75 basis points, according to Markit data, 2.75 basis points wider versus late on Monday.
In the past seven weeks, the Europe index has tightened by more than half from its March 17 peak of 166 basis points. "The general sense is that this is a bear market rally," said Willem Sels, head of credit strategy at Dresdner Kleinwort. "How far can this go, especially if you have macro data that is continuing to point downwards?"
On the schedule for the week are a rate decision by the Fed's policy-making committee on Wednesday, ISM manufacturing data on Thursday and payroll numbers on Friday. "Fundamentals have not changed except at the senior level for the banks. For the rest of the (credit derivatives) market, people are wondering why it is rallying so sharply," Sels said.
The Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 436 basis points, 11 basis points wider. "It's a retracement. You see it all the time when you have a pretty sharp move in one direction," one trader said.
Among single credits, five-year credit default swaps on senior Deutsche Bank debt widened by about 4 basis points to 58.50 basis points, according to Markit data. The German bank posted its first quarterly loss in years after a writedown of 2.7 billion euros and a slump in revenue at its investment bank. CDS spreads on two other companies widened after they took bond issues to market.
British advertising company WPP Group Plc priced a 750 million euro, eight-year euro bond at mid-swaps plus 215 basis points. CDS on WPP 2005 Ltd, a constituent of the Europe index, widened by about 14 basis points to 110 basis points, according to Markit. UK publisher Pearson Plc was also reported to be selling five- and 10-year bonds in the United States. Its CDS widened by about 8 basis points to 55 basis points, according to Markit.