European corporate debt fell sharply for a third day on Thursday as declining global stock markets prompted investors to dump bonds and buy protection against defaults.
The iTraxx Crossover index, a benchmark for the riskier high yield market, traded at 217 basis points at 1530 GMT, according to one dealer, some 6 basis points wider on the day. It earlier rose to as high as 226 basis points.
"Yesterday was probably the busiest on the indexes ever and today is the second busiest," said a broker in London. "The market is swinging all over the place."
Credit spreads widened after US stocks fell amid concern over a rise in the yen that suggested the era of low-rate borrowing in the Japanese currency may be coming to an end. The Bank of Japan lifted borrowing costs by 0.5 percent in February.
Equity markets recovered slightly after a US factory survey was stronger than expected, though investors were divided over the outlook for global assets.
"You are seeing a lot of different views in the market but from our perspective there is probably more spread widening to come," said Vivek Tawadey, head of credit strategy at BNP Paribas. "We are likely to see a rise in consumer defaults in the US and the best in terms of corporate earnings is definitely behind us."
The Crossover index touched a tight level of 168 basis points last week, spurred by low defaults, strong corporate earnings and huge demand for credit. A nearly 10 percent decline in Chinese stocks on Tuesday prompted an upsurge in volatility which reverberated across countries and asset classes.
Analysts said concerns over the US subprime mortgage sector that arose last week had not gone away despite Federal Reserve Chairman Ben Bernake saying there was little indication of contagion into other mortgage markets.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros also rallying, yielding an average 45 basis points more than similarly dated government bonds at 1550 GMT, unchanged on the day.
Credit default swaps on J. Sainsbury rose, reversing a fall on Wednesday, after Marks & Spencer said it had decided not to bid for Britain's number three supermarket group for now, making a debt-heavy leveraged buyout (LBO) appear more likely. Five-year CDS on Sainsbury rose 8.5 basis points to an 88 basis point mid-price, another trader said.
In telecoms, one of the market's biggest sectors, the cost of insuring the debt of Telecom Italia fell, a trader said, on continued speculation Telefonica may still be considering buying a minority stake in Olimpia, which controls Telecom Italia.
Five-year credit default swaps on Telecom Italia tightened 3 basis points to a 47 basis point mid-price, according to HSBC pricing. That means it costs 47,000 euros a year to insure 10 million euros of the company's debt against default.
The market has been awaiting news on possible Telefonica moves in Italy, although Telefonica did not mention it in its earnings statement on Thursday.