European credit markets rallied on Tuesday as the continent's equity markets bounced back sharply from days of selling, but traders said the action gave little clue as to where the market would go from here.
By 1445 GMT, stock markets in France, Germany and the UK were up well over 2.5 percent, while the Dow Jones Industrial Average was up 0.63 percent, buoying the mood in the corporate bond market.
Fears over inflation and the future path of interest rates as well as turmoil in commodity markets have hammered equity and credit markets in recent days, with Monday seeing the greatest widening in European credit indexes so far this year.
By 1430 GMT, the iTraxx Crossover index, made up mainly of high-yield credits, was at 264 basis points, some 11 basis points less on the day, having earlier been as low as 262 basis points. Despite the sharp gains, it had not made up for all of Monday's widening of some 17 basis points.
"Considering the violence of the move out, it was natural to have a correction," said one derivatives trader in London. "Whether this is just a correction or an inflection point - and we're going tighter from here - is difficult to say."
The one guarantee, it seems, is for greater volatility, he said.
Others agreed, saying that while sentiment was better in the market on Tuesday, that could change swiftly. "Follow the equities; that's where we're going," said one bond trader in London.
The iTraxx Europe index of 125 investment-grade credit default swaps was around 1.5 basis points tighter at 31.75 basis points.
In the cash bond market, the move was more restrained than in derivatives, with a trader saying that further confirmation was needed of the bounce in equity markets.
"If we get another decent day in equities, I'm sure we can rally from here," he said.
Long-dated telecoms bonds gained, but the move stalled by mid-afternoon, he said. Telecom Italia's 5.25 percent euro bond due 2055 was bid at 209 basis points over government bonds by 1440 GMT, some 4 basis points less on the day.
Despite the turmoil in the secondary markets, Belgian drug and chemical company Solvay sold a 500 million euro hybrid bond on Tuesday to refinance existing bonds and strengthen its balance sheet.
The bond pays a coupon of 6.375 percent and was sold at a spread of 235 basis points over swaps. Analysts said the turbulent markets had compelled the company to offer a substantial premium to drum up investor interest.
But the strategy appeared to pay off. One of the lead managers said the order book was about 1.5 billion euros.
In the high-yield markets, there was some clarity on the financing backing UK cable company NTL's financing of its merger with rival Telewest.
NTL said on Tuesday it had decided not to wait for a US tax ruling on the financing and would refinance a 1.8 billion pound ($3.4 billion) bridge loan in such a way as to cut interest costs.
NTL said the bridge facility would be refinanced through an additional tranche of senior debt and a bond offering, with the new bonds ranking equally with the company's existing bonds, instead of wholly through a bond issue.
NTL said previously the structure for the refinancing would comprise 1.2 billion pounds of bank debt and a 600 million pound bond issue.
The company's existing bonds fell, a trader in London said, because the new bonds would rank equal to them rather than being subordinated. The new bonds will be issued by NTL Cable Plc. NTL's 9 percent euro bond due 2014 fell by 1.5 percentage points to be bid at 102 percent of face value, the trader said.