European spreads little changed

European credit spreads were little changed on Tuesday after widening in initial response to weak US home price data and then recovering on the realisation that the figures had come in as forecast. By 1609 GMT the Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 475.50 basis points, according to data from Markit, 1.5 basis points wider when compared with late on Friday.
The investment-grade Markit iTraxx Europe index was little changed at 86 basis points. The Main Europe index earlier had widened to as much as 92 basis points after data showed prices of US single-family homes had plunged a record 14.1 percent in the first quarter from the year before, a pace five times faster than in the last housing recession, according to the Standard & Poor's/Case Shiller index.
Spreads then tightened again on the realisation that, although very negative, the figures were in line with expectations, said Puneet Sharma, a credit strategist with BNP Paribas.
Economists' median forecast in a Reuters survey had been for a drop of 14 percent. US sales of new homes rose 3.3 percent in April but were down 42 percent from a year ago, the largest year-on-year drop in nearly 27 years, government data showed.
European spreads widened slightly later in the afternoon after a measure of US consumer confidence unexpectedly plunged to its lowest level in 16 years in May, Sharma said. The market changed direction dramatically last week, with the Main Europe index moving from the low 60s level to Tuesday's 92-basis point high.
Spreads have now become more sensitive to economic data than they were in late March and April, "when sentiment was so bullish that even though the numbers were not great the market continued to rally," Sharma said.
"We are projecting that the Main could go to 175 to 200 basis points before the end of the year," he said. That would amount to fresh record wides, exceeding the 166 level in March. "The uncertainty around economic scenarios now is huge," he said. "It doesn't matter whether you predict a recession, no recession or a depression, because the uncertainty is so large."
The current levels on the Europe index do not sufficiently compensate investors for risks that investment-grade credits could be downgraded to junk levels and that the equity markets are relatively overpriced and could drop, he said. "Given these kinds of uncertainties and the fact that our market over-reacts, we see the potential for these levels," Sharma said.
Five-year credit default swaps on UBS were nearly 6 basis points wider at 78.25 basis points, according to data from Markit. The Swiss bank had warned on Monday that it continued to be exposed to US mortgages and might record additional losses from that exposure.