Weakness in US automakers' debt persisted on Tuesday as the credit market continued to feel the fallout from Ford Motor Co's announcement of deep production cuts on Friday, although trade was thin.
In the broader market, credit indices retreated for the second day running as the German ZEW index came in far weaker than expected and stocks were lacklustre.
The cost of insuring against a default by Ford continued to rise on Tuesday, reaching a high of 740 basis points, some 25 basis points more on the day, before trading back down at 715 basis points, a trader in London said.
Moody's Investors Service and Standard & Poor's are both considering cutting Ford's ratings. S&P said on Monday it might downgrade eight US auto suppliers as a result of Ford's decision to slash output.
But activity was low, the trader said. "Fifty percent of the market is still on holiday," he said. Default swaps on rival General Motors Corp, which the credit derivatives market now judges to be faring better than Ford, traded at 650 basis points, around 20 basis points wider than last week, he said.
The iTraxx credit derivatives indexes initially gained early on Tuesday, but reversed course after the ZEW report showed German investor sentiment plunged in August to its lowest level in over five years. The iTraxx Crossover index, made up mostly of "junk" rated credits, was 2 basis points wider at 254 basis points by 1430 GMT, another trader in London said.
"It's no big deal, there are relatively low volumes, but we couldn't sustain the tightening trend," he said. However, the bigger picture - in particular the roll to a new series of iTraxx contracts in September - may help to push spreads tighter, he said. At the last roll in March, the iTraxx Crossover index tightened sharply in the month preceding the roll, hitting a low of around 240 basis points, before backing up sharply when the new contracts were introduced.
"I suspect we're going to go tighter, and I wouldn't exclude a scenario similar to what we saw last time," the trader said. Buyers of protection may wait for the introduction of the new contracts before resetting hedge positions, meaning that the index can tighten ahead of the roll due to the imbalance between sellers and buyers of protection.
The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 51.7 basis points more than similarly dated government bonds at 1455 GMT, unchanged on the day.