European credit opened sharply tighter on Thursday, buoyed by a rebound in US and Asian equity markets on the view that fears of the subprime mortgage problem spreading were overblown and had left stocks looking cheap.
The iTraxx Crossover index, a key marker for sentiment about riskier European credit, tightened 15 basis points to a 222 basis-point mid-price, a trader said, 26 basis points tighter than this week's widest level.
"We're aggressively tighter on the Crossover following the positive close in the US," he said, "It's been a very, very volatile week, very whippy." The iTraxx Europe index, made up of investment-grade names, tightened 0.75 basis points to 24.75 basis points, he said.
"While subprime concerns were largely brushed aside by the market in the US afternoon yesterday, the issue remains closely watched and the potential for further headlines, which would be likely to reawaken fears, is significant," Dresdner Kleinwort analysts wrote in a note to clients.
"Furthermore, LBO risk is back on the agenda, weighing on the retail sector in particular," the analysts wrote. The cost of default protection on Altadis rose on talk the Franco-Spanish tobacco group is to sell a 60 percent stake in its logistic firm Logista for 1.2 billion to 1.3 billion euros. Both Altadis and its Logista unit have been suspended by the Spanish bourse.
Five-year credit default swaps on Altadis widened 10 basis points to a 38.5 basis point mid-price, a second trader said. Elsewhere, the cost of default protection on Britain's Cadbury Schweppes Plc fell, after it said it was planning to split its global confectionery division and its American soft drinks into two separate businesses.
The move comes after Cadbury, the world's largest confectionery group, revealed on Tuesday that US activist investor Nelson Peltz had taken a 2.98 percent stake and analysts said Peltz would pressure Cadbury to split in two.
Five-year credit default swaps on Cadbury tightened 5 basis points to a 50 basis point mid-price, a third trader said. Rob Orman, a credit analyst at the Royal Bank of Scotland said: "'Separate' is a euphemism for sale or demerger, however we think it is almost inevitable that it would end up being a sale of the US Beverages business, most likely to private equity.
Five-year credit default swaps on British grocer Morrison fell 5 basis points to a 57 basis point mid-price, the third trader said, after the company reported a six-fold rise in profit and its chairman said he was not aware of any bid approaches for the company.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 46.7 basis points more than similarly dated government bonds at 0914 GMT, 0.2 basis points less on the day.
In the primary market, British retailer Marks & Spencer Plc plans to issue a 5-year benchmark sterling bond after meeting investors next week, the banks managing the sale said.
In underlying government bond markets, the yield on the interest-rate-sensitive two-year Schatz was 3.894 percent, 0.7 basis points more on the day. The 10-year Bund yielded 3.903 percent, 0.2 basis points more. The 10-year euro swap rate was 4.155 percent.