The Series 6 iTraxx credit derivative indices hit record tights in Europe on Wednesday, after consumer price data sparked hopes that the US economy might not be slowing as rapidly as thought.
Traders said the iTraxx Crossover and Europe indices, made up of junk- and investment-grade credits respectively, both rallied in heavy flows after the latest monthly CPI data showed the biggest drop since November 2005 from falling energy prices.
"They were both firm after CPI, but the Crossover especially, down to 258 basis points, compared to 265 last night," one trader said. Traders saw the Series 6 Crossover index fall some 6 basis points to 259 basis points, and the Europe index tighten 0.5 basis points to 27 basis points.
The surprise slide in CPI wiped out any hopes that the inflation data would trigger spread widening in the credit markets, thus allowing investors who are underweight on risk to get back into the market.
Royal Bank of Scotland analysts said before the data on Wednesday that they were feeling increasingly nervous that the status quo of too much money chasing tight spreads and taking on either increased leverage or increased risk would be maintained.
Elsewhere, credit default swaps on Finnish paper maker M-real rallied sharply as the company announced an extensive plan to cut costs and capacity and appointed a new chief executive to drive the improvements.
M-real's shares rocketed and were up over 16 percent by 1415 GMT, and the credit market reacted in similar fashion, with five-year default swaps rallying 45 basis points to 375 basis points. Early in the session the credit protection cost had fallen to a low of 360 basis points, but backed off those levels as traders and investors sought more details on the plan. Moody's Investors Service affirmed the company's rating at B2 with a negative outlook, saying there were uncertainties over asset sales and the successful implementation of efficiency improvements.
"They've come out with a plan, but Moody's has kept them on negative (outlook)," a trader said. "It's been a good day for M-real but the froth has come off it a bit."
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 52.3 basis points more than similarly-dated government bonds at 1502 GMT, 0.6 basis points less on the day.
Deutsche Telekom tightened guidance on a maximum 1.5 billion-euro ($1.88 billion) 7-year bond that it plans to sell, a banking source said on Wednesday.
The bond will be priced to yield 67-69 basis points over mid-swaps, less than the previous guidance of around 70 basis points, the source said. Pricing is expected on Thursday. A reduction in spreads is usually a sign of strong investor demand.
A telecoms trader in London said the reaction in DT's bonds and credit default swaps was muted. Five-year CDS stood unchanged on the day at 43 basis points.
"It's a solid deal. But I think investors would have preferred a coupon step. People would be willing to give up a couple of basis points if there was some coupon language," he said.
Deutsche Telekom on Tuesday hired Deutsche Bank, Goldman Sachs and Societe Generale to manage the sale. It said the sale would "safeguard Deutsche Telekom's liquidity reserve position" and would not add to net debt.