European speculative-grade credit spreads surged to record wides on Friday as investors hedged against dumped loans, global stock markets plummeted and fears grew that funding holes will push companies to default. By 1547 GMT, the Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 727 basis points, some 52 basis points wider.
At its widest the index hit 748 basis points, a move of 110 basis points in the past two days alone. The rout in global equity markets and the liquidation of Icelandic bank loan books, following the collapse of Kaupthing, Glitnir and Landsbanki was a key driver of the widening in high yield spreads.
"It's a hangover from yesterday on the loan side, and then of course equities have been smashed again," the trader said, adding that buying the Crossover as a hedge was ineffective. As the Crossover hit its wides, European shares were down almost 10 percent. The FTSEurofirst closed unofficially down 7.8 percent, while US shares were about 5 percent lower.
The investment-grade Markit iTraxx Europe index was at 139.25 basis points, according to data from Markit, 9.25 basis points wider and well below record wides of 166 basis points hit in mid-March. "Current market conditions are undoubtedly the most volatile in living memory," said Citigroup credit strategists in a note, warning that indexes have probably not seen their widest levels yet.
As financial markets melt down, leaders of the world's major economies are due to meet to discuss the deepening crisis over the weekend. "So much for quiet Sundays," Citi wrote. "Headlines from the G7 are likely to keep us busy this weekend, followed by the IMF meeting early next week."
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