Bonds in British retailer GUS fell and the cost of its credit default swaps rose on Monday after it said it had no plans to buy back $2 billion of outstanding bonds after a demerger.
Five-year credit default swaps on GUS traded 7 basis points wider bid at 53 basis points, while its 5.625 percent sterling notes due 2013 widened 20 basis points to 72 basis points over gilts, a trader said.
"People are not happy with the decision not to buy back," said a trader in London. "The rest of the market is also weaker, because of equities."
Buyback rumours can lead to big swings in bonds and credit derivatives. Default insurance can become worthless if the bonds it refers to are taken out of circulation.
GUS is the latest buyback-related story to attract speculators' attention after Denmark's TDC and ISS, Colt Telecom and British retailer Sainsbury in the past year saw huge price swings amid similar betting sprees.
In a busy trading day elsewhere, the recent spread-widening trend in the credit markets continued as worries over high commodity prices and accelerating inflation prompted sell-offs in corporate bonds and equities.
The iTraxx crossover index, a benchmark for credits rated below investment grade, widened 11 basis points by mid-afternoon to 270 basis points, according to Deutsche Bank. The main iTraxx Europe index widened 1.25 basis points to 32.5 basis points.
Still, the cost of credit protection cost on VNU was little changed, a trader said, after a four-notch rating downgrade to "junk" by Standard & Poor's.
The move came after private-equity consortium Valcon declared victory in its battle to acquire the world's largest market research company.
S&P cut VNU's rating to B+ and said it might cut one more notch, because it expected VNU to have a "very highly leveraged capital structure" after the take-over.
Five-year credit default swaps on VNU were unchanged, bid at 195 basis points, one trader said, meaning it costs 195,000 euros a year to insure 10 million euros of its debt against default.
"The downgrade was totally expected. It's playing out exactly as we thought," he said.
In March Moody's Investors Service cut VNU to Ba1, equivalent to S&P's B+ rating. Both ratings are four notches below investment grade.
Still, pricing on the credit was tricky, with one trader quoting the CDS 2 basis points wider at 200 basis points, while another said it was 7 tighter at 195 basis points. Credit default swaps are traded over-the-counter, rather than on an exchange, making accurate price discovery difficult.
The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 48.2 basis points more than similarly-dated government bonds at 1430 GMT, 0.7 basis points more on the day.
Belgian drug and chemical company Solvay's planned 500 million euro ($639 million) hybrid bond will be priced to yield in the area of 235 basis points over swaps, a banker familiar with the deal said on Monday.
The level reflected recent turbulence in the credit markets, analysts said.
The hybrid bond, which blends features of equity and debt, is very likely to be priced on Tuesday, the banker added.