Retailers were in focus early on Tuesday as British grocer Sainsbury had its credit ratings cut and a newspaper report suggested French retailer Carrefour could issue a profit warning later in the day.
"Sainsbury has been pretty active again this morning," said one credit derivatives trader.
Late on Monday, Standard & Poor's cut its long-term rating on Sainsbury to BBB, two notches above "junk", and said it might cut the ratings again.
After leaping to 140 basis points in early trade, five-year default swaps on J Sainsbury Plc eased to around 132 basis points, up 5 basis points on the day, he said. The price means it costs 132,000 euros a year to insure 10 million euros of the supermarket chain's debt against default.
The company warned on Monday that first half profits could slump nearly two-thirds from last year.
French retailer Carrefour also came under pressure ahead of turnover figures due for release on Tuesday at 1730 GMT. French newspaper La Tribune said the retailer could lower its full-year sales and profit targets, without citing sources.
"People are expecting an earnings warning," said the trader. Five-year default swaps on Carrefour were at 24 basis points, two basis points more on the day.
In the wider market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 46.7 basis points more than similarly dated government bonds at 0800 GMT, 0.4 basis points more on the day.
Long dated bonds of US auto maker General Motors were under pressure ahead of an expected announcement on an eagerly awaited reorganisation plan for its loss-making European operations.
An industry source said GM was expected to announced the reorganisation when the company releases quarterly results on Thursday. Germany's Frankfurter Allgemeine Zeitung said Opel was likely to bear the brunt of GM's European cost cuts, losing 6,000 to 7,000 jobs.
The spread on GM's 8.375 percent euro-denominated bond due 2033 was three basis points wider at 282 basis points over government bonds, a trader said.
Traders and analysts said the restructuring news was negative in the short-term due to the large costs involved in cutting jobs in Germany where unions remain strong.
"We are still expecting GM to be cut to BBB- with a stable outlook within the next 4 months and feel that any restructuring charge well above $500 million could be a trigger for S&P to act," said Dresdner Kleinwort Wasserstein analysts in a note.
Elsewhere, Hannover Re's euro bond due 2024 was four basis points wider at 98 basis points over government debt after the German insurer cut its 2004 net profit forecast to 300 million euros from 390 million euros on account of a series of hurricanes in the US and the Caribbean, traders said.
In the primary market Italian power grid firm Terna has split its 1.4 billion euro bond into a 600 million-euro 10-year tranche and a 800 million-euro 20-year tranche that will be priced on Tuesday, sources close to the deal said.
The 10-year tranche will yield 22 basis points over midswaps, while the 20-year tranche is set to yield 38 basis points over midswaps, the sources said.
French construction to telecoms company Bouygues plans to launch a 10-year benchmark euro-denominated bond, lead managers for the deal said on Tuesday.
ABN Amro, BNP Paribas, Deutsche Bank and J.P. Morgan said the bond would be launched in the near future subject to market conditions, following an investor conference call scheduled for Tuesday morning.
In underlying government bond markets the yield on the interest rate sensitive two-year Schatz was 2.456 percent, 2.7 basis points lower, while the 10-year Bund was yielding 3.919 percent, just under a basis points less on the day. The 10-year euro swap rate was 4.035 percent.