The cost of default insurance on the iTraxx Crossover index rose sharply again on Monday as falling equities and concern over rising Japanese interest rates dampened investor demand for corporate debt.
The Crossover five-year index, a key indicator of appetite for riskier credit, widened as much as 28 basis points before paring losses to trade 23 basis points wider at a 243 basis points mid-price, a trader said.
The index has widened nearly 75 basis points since the beginning of last week. That compares with a 150 basis point jump after the downgrades of US auto makers Ford and General Motors in May 2005. Compared with the indexes, single name default swaps and cash bonds have been relatively untroubled, traders and strategists said, as low supply and printing of structured credit products helped fuel demand.
The Crossover is trading 10.8 basis points wider than its combined underlying constituents, according to J.P. Morgan, while the 10-year is 22.1 basis points wider. "The indexes are following what equities are doing but the underlying is fairly firm," said Umang Vithlani, senior credit strategist at ING Bank in Amsterdam. "The markets are yet to be convinced this is the turn in the credit cycle," though there is further volatility ahead, Vithlani said.
European shares sank to three-month lows earlier on Monday as the global equity sell-off battered investor confidence and the yen hit three-month highs against the dollar. Shares recovered some ground but were still trading down at 1530 GMT.
Earlier, the cost of default protection on Portugal Telecom fell, dealers and traders said, after shareholders on Friday effectively rejected a hostile 11.8 billion euro ($15.6 billion) take-over bid by smaller rival Sonaecom.
Five-year credit default swaps on Portugal Telecom traded 8 basis points tighter at 70 basis points, meaning the cost of default protection dropped 8,000 euros per 10 million euro face amount.
Battered markets continue to make it difficult for Italian car maker Fiat to launch its planned bond, sources close to the operation said on Monday. "The credit market isn't showing signs of panic ... but it's a volatile market and it's difficult to indicate a price for any issuer wanting to tap capital markets," said a source close to the deal.
Fiat on February 27 announced plans for a benchmark euro bond issue, to cover general expenses including debt refinancing. Lead managers of the planned issue are Calyon, BNP Paribas and UBS.