Europe caught the holiday mood on Tuesday as Independence Day celebrations in the US dampened enthusiasm for taking a view on euro region credit markets. The iTraxx Crossover index took a breather from its recent strong rally, trading late in the day little changed at 260 basis points, some 55 basis points tighter than the recent wide levels.
Credit markets fell sharply in June amid concern over weaker equities, faster inflation and the threat of higher interest rates. However, a US Federal Reserve hint that its recent run of rate rises may be approaching an end has dampened volatility and set spreads tighter in recent sessions.
"Liquidity in this market is an illusion," said one trader in London. "It takes very few banks to drop their bids and the indexes come screaming in."
Among the few movers on Tuesday, the cost of default protection on Renault fell as investors shrugged off a 2 percent drop in the company's share price amid continuing speculation over a tie-up with troubled US auto maker General Motors.
Five-year credit default swaps on Renault traded at 46.5 basis points, said a trader, meaning it costs 46,500 euros to insure 10 million euros of the company's debt against default. The contract had risen to as high as 51 basis points in recent days.
France reacted cautiously on Tuesday to the idea of a tie-up between Renault, its Japanese partner Nissan and GM. French Industry Minister Francois Loos said in a television interview he welcomed Renault's efforts to pursue a global strategy but also highlighted the pension deficit and other problems faced by GM, the world's biggest carmaker.
Renault and Nissan said on Monday they were ready to start talks on an alliance with General Motors Corp, provided the US group asked them. Together the three companies would form a $100 billion global industry giant. Five-year default swaps on GMAC, the financing arm of GM, were not trading, another trader said.
Elsewhere, few deals were completed as Europe sat on its hands over the US Independence Day holiday. The cost of default protection on French retailer Casino held steady at 73 basis points, a trader said, while Finnish engineering company Metso was little changed at 77 basis points.
The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 54.1 basis points more than similarly-dated government bonds at 1415 GMT, 0.4 basis points less on the day.
In the primary market, the region of Ile de France plans to issue an 11-year bond worth 200 million to 250 million euros ($256.2-320.3 million), an official at one of the banks managing the sale said on Tuesday. The bond is to be priced later this week to yield around 4 basis points less than mid-swaps, the official said.
Ile de France, which includes Paris and is the most populous of the French regions, is rated triple-A by all three major ratings agencies. Schneider Electric, the French specialist in power and process controls equipment, is expected on Wednesday to sell 1.0 billion euros of bonds, comprising a five-year floating-rate note (FRN) and a 7-1/2-year fixed-rate bond, each of 500 million euros.
The FRN will probably be priced to yield 22 to 24 basis points over three-month Euribor and the bond "low 30s" basis points over mid-swaps, sources said on Monday.