French automaker Renault dominated attention in an otherwise thin European corporate bond market on Monday, as concerns built ahead of a board meeting that will discuss a plan for a tie up with General Motors Corp.
Elsewhere, the impending July 4 holiday in the United States left the market largely becalmed, although the positive tone seen in the wake of last week's US interest rate decision was maintained, traders said. The cost of insuring against a default by Renault rose further on Monday, with five-year default swaps on the company at 50 basis points by 1410 GMT, a trader in London said, 10 basis points more on the day.
That brings the move wider to 20 basis points since GM's most high-profile investor, billionaire Kirk Kerkorian, last week urged the US company to consider a three-way partnership with Renault and partner Nissan.
Analysts at Royal Bank of Scotland said while the possible tie up was a surprise, Renault spreads had overreacted - although they would remain volatile.
"The all-important question is the size of the stake that would be taken in GM. However, given GM's rather low, albeit rising, market cap at the moment, Renault and Nissan actually have quite some capacity to take a stake without affecting their credit profile too much," they wrote in a note to clients.
Elsewhere, the iTraxx Crossover index, made up mainly of default swaps on "junk"-rated companies, continued its tightening trend, hitting 262 basis points, some 5 basis points less on the day, by 1400 GMT.
The index has tightened by around 50 basis points in the past week, with the bulk of the move coming in the last three days, leading to questions over whether the market's optimism can be sustained.
"Is the past week's strength all a 'headfake'?" asked analysts at J.P. Morgan in a note to clients. "We don't think so. At the moment, we don't see our radar screen flashing red with the sorts of factors that would suggest a structural change in spread regime."
A trader suggested that spreads could see something of a reversal if borrowers step up activity before the summer lull descends. The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 54.8 basis points more than similarly-dated government bonds at 1500 GMT, 0.8 basis points more on the day.
One new borrower of note emerged on Monday as the Wellcome Trust, the world's second-biggest foundation funding biomedical research, announced plans for a debut bond, aiming to swell the cash it can invest to fund research that spans the human genome, bird flu and malaria.
The Trust plans to sell the first public bond from a UK charity, it said on Monday, following the example of US philanthropic foundations such as the Howard Hughes Medical Institute and the J. Paul Getty Trust, who have sold dollar bonds.
Britain's largest charitable trust plans to take advantage of low-cost, long-term funding in the sterling bond market to raise 300 million to 500 million pounds, selling a bond with a maturity of about 30 years, Wellcome Trust Chief Investment Officer Danny Truell said.
Barclays Capital, J.P. Morgan and Morgan Stanley will manage the sale. And a 1.0 billion euro 2-part bond for Schneider Electric, the French power and process controls equipment specialist, drew closer as price guidance emerged.
Schneider plans to sell a 5-year floating-rate note (FRN) and a 7-1/2-year fixed-rate bond, each of 500 million euros. The FRN will be priced to yield 22 to 24 basis points over 3-month Euribor, and the bond "low 30s" basis points over mid-swaps, the official said. ABN Amro, Calyon and Societe Generale are managing the deal for Schneider Electric, which holds an A credit rating from Standard & Poor's.