French cement maker Lafarge brought a two-part euro bond sale to the market on Monday, as credit spreads tightened further despite continued debate about whether the credit crisis was over the worst.
By 1503 GMT, the Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 401 basis points according to data from Markit, 14 basis points tighter versus late on Friday.
The investment-grade iTraxx Europe index was at 66 basis points, 2 basis points tighter. "We're tighter in the absence of any big news and credit is using stocks as a guide of where to go, although volumes are light there as well. We're definitely heading into the (quiet) summer," a trader said.
Credit spreads have staged a strong rally since the cut-price sale of Bear Stearns in March, but uncertainty is growing as to whether the tightening has been overdone, with some strategists surprised by how long the rally has lasted.
European Central Bank President Jean-Claude Trichet warned on Monday the end of the credit crunch was not in sight and that the world was experiencing an "ongoing and very significant market correction".
"I think what Trichet said is probably true. I think US politicians have an incentive to say the worst is over as there is an election coming up," the trader said.
"I don't think the market really believes the worst is over, apart from in financials maybe. But I do think we are going to have to wait for the third quarter before we start to see a bigger impact on the consumer and corporates."
Some fund managers remain relatively upbeat, however. James Gledhill, head of fixed income at New Star Asset Management, for example, said financial bonds still offer good value.
"We're pretty positive about credit spreads and we think we can perform well," said Gledhill on a teleconference on Monday. "But I would not want people to get the message that we are blinkered, with rose-tinted glasses, and think the economy is going to be perfect from now on.
"We think we are going to see a weak economy but, because of how weak credit has been, even in that environment we think credit can perform." In terms of data on Monday, the Conference Board's Leading Economic Indicators showed the US economy was weak but has side-stepped a recession. The news helped lift US stocks as fears about the economic outlook eased. Other key data this week includes Germany's ZEW economic sentiment index on Tuesday and the Ifo index of German business sentiment on Wednesday.
In the US, the highlights in a relatively quiet week for economic releases are the producer price index on Tuesday and existing home sales on Friday. Elsewhere on Monday, the primary market saw a new bond sale from Lafarge.
The French company set final guidance on a 750 million euro ($1.17 billion), three-year bond at mid-swaps plus 125 basis points, and a seven-year bond of the same size at mid-swaps plus 170 basis points.
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