European credit spreads broaden

European credit spreads widened on Tuesday, with fresh concerns about Lehman Brothers' capital needs eroding a short and sharp rally after the bailout of mortgage lenders Fannie Mae and Freddie Mac. By 1547 GMT, the investment-grade Markit iTraxx Europe index was at 101.5 basis points, according to data from Markit, 2.5 basis points wider versus late on Monday.
The Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, widened 3.25 basis points to 546.25 basis points. "It's incredible what has happened in the last two days, said Jochen Felsenheimer, head of credit strategy at UniCredit (HVB), referring to volatile movements in the iTraxx indexes since Friday.
The US government seized control of mortgage lenders Fannie and Freddie over the weekend, prompting the sharpest credit spread rally since March, early on Monday. But the tone subsequently turned more negative on Tuesday in response to Lehman's woes. Shares in Lehman plunged more than 30 percent and its credit default swaps (CDS) widened 125 basis points to 450 basis points on uncertainty about the bank's ability to sell its asset management business and raise capital.
BNP Paribas credit strategist Andrea Ciccione said that despite removing much of the short-term systemic risk, "this bailout though doesn't solve the housing problem, which needs to bottom before we start recovering." Lehman Brothers has been in talk with investors, including state-owned Korea Development Bank (KBD), on a possible capital infusion. KBD has kept silent on talks with Lehman, but said it was aiming to be a top three investment bank in Asia within the next five years.
Primary markets jumped into action with fresh bonds from entertainment group Vivendi and Centrica, which is owned by British Gas. In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 131.4 basis points more than similarly dated government bonds, 1.1 basis points more on the day.
In underlying government bond markets, the yield on the interest rate sensitive two-year Schatz was 4.058 percent, 3.1 basis points more on the day. The 10-year Bund yielded 4.069 percent, 0.4 basis points more. The 10-year euro swap rate was 4.600 percent.