Credit spreads pare early widening

European credit spreads pushed wider but then recovered on Tuesday, helped by gains in equities as US economic data helped to offset fears over a resurgence in the credit crisis that has plagued markets since last August.
By 1457 GMT, the Markit investment-grade iTraxx Europe index was at 85 basis points, according to Markit data, 1 basis point wider versus late on Monday.
The iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was 2 basis points wider at 473 basis points. The indexes had been quoted wider during the European morning but rallied as US stocks gained during the afternoon, helped by an unexpectedly strong report on factory orders.
A trader said activity had been relatively quiet. "There isn't massive conviction to be honest," he said. "The market didn't react as much as it should have done to factory orders." "Friday we've got non-farm (payrolls), so that is probably the number to look at, and until then we follow equities."
However, some are warning that there could be renewed turmoil ahead. "Volatility should rise further and markets are likely to keep a negative tone in the coming days," said Willem Sels, a credit strategist at Dresdner Kleinwort in London.
"The news of the past weeks paints a picture of more threats intensifying than easing." The financial sector was in the spotlight again, with speculation that Lehman Brothers might have to raise more equity and a wave of credit ratings downgrades for some of Wall Street's biggest firms. Standard & Poor's and Fitch Ratings also said they were looking at UK banks.
"For banks ... there is only one decisive question for June: is there light at the end of the tunnel, or is it the light of an approaching train?" financials analysts at UniCredit said in a note to clients.
"It is both from the banks' perspective," they said, with fears receding over massive financial asset write-downs, but concerns increasing over loan book quality. However, they argued that spreads on bank debt were over-compensating for the risks. "Financial spreads continue to mirror horror scenarios, which are fortunately not on the agenda."
In the primary market, French retailer Carrefour sold a 1 billion euro 7-year bond at mid-swaps plus 70 basis points, according to International Financing Review, a Thomson Reuters publication. The bond was priced at the tight end of the guidance range of 70-73 basis points over mid-swaps, suggesting good demand.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 111.1 basis points more than similarly dated government bonds, 0.4 basis points less on the day.