European credit indexes retreated from record levels on Thursday afternoon, after the European Central Bank's president indicated it could raise interest rates, while US reports showed little growth and worsening inflation.
"The market started very strong this morning, but now it's gone a bit weaker on the back of Trichet's comments and US data," a trader said. "It seems as though everyone's just trading the indexes, people are not really watching single names at the moment."
The iTraxx Crossover index widened 5 basis points off the tightest levels of the day, to a little changed 244.5 basis points, the trader said.
Credit indexes have rallied sharply, hitting record levels in the last two weeks, as optimism about the backdrop for credit and demand for Constant Proportion Debt Obligations (CPDOs) - a new way of parcelling up credit risk that pays a fixed return to buyers - has boosted the market.
"With the kind of tightening we've been seeing, it's obvious that there's going to be some reversing of gains," another trader said.
ECB President Jean-Claude Trichet, after leaving eurozone interest rates on hold at 3.25 percent, said "strong vigilance remains of the essence," - signalling that markets are correct to expect an interest rate rise in December.
And US government data showed unit labour costs, an inflation measure, rose more than expected last quarter and business productivity stalled, raising the spectre of little growth and worsening inflation.
Elsewhere, default swaps on Ahold rallied after the Dutch retailer posted a marginal rise in quarterly sales, ahead of a long-anticipated review on Monday which analysts expect will include cost cuts and sales of underperforming assets.
A person familiar with the matter told Reuters US private equity firm Clayton, Dubilier & Rice was interested in Ahold, while cautioning it was not in talks with the retailer, as the Financial Times had reported earlier. Ahold declined to comment on the report.
Royal Bank of Scotland credit analysts wrote: "The FT article also suggests that interest from private equity interest from Blackstone & KKR in buying all or part of Ahold has 'cooled.'"
"The diminished interest from private equity and the fact that Ahold will be better placed (smaller and more focused) to merge with Delhaize should all drive spreads tighter today," the RBS analysts wrote in a note to clients.
Five-year default swaps on Ahold fell about 12 basis points to 97.5 basis points, a third trader said, meaning it costs 97,500 euros a year to insure 10 million euros of its debt against a default.
Elsewhere, credit default swaps on French car parts maker Valeo tightened more than 11 basis points to a 69.5 basis point mid-price, another trader in London said, but he said the move had been driven by a rival aggressively pushing the price down.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 50.8 basis points more than similarly-dated government bonds at 1613 GMT, 0.8 basis points less on the day.