European credit markets held firm on Wednesday, supported by upbeat factory activity data in the United States and some positive corporate earnings reports. The iTraxx Crossover index, viewed as a barometer for risk appetite, edged back to 199.5 basis points by 1420 GMT. That was unchanged on the day after moving 1 basis point wider in early trade.
"The market has been very stable," a trader in London said. "The Crossover should continue to tighten steadily in the next few weeks, supported by a general good tone in the market. Earnings have been very positive and defaults still low," the trader said.
US economic data also lent support to credit markets. US industrial output rose 0.7 percent in April, more than double the rate forecast by economists in a Reuters poll, and while housing figures were more mixed, a rise in housing starts appeared to boost hopes the housing market may be stabilising.
Net bond issuance is still relatively low, the trader said, which was ALSO helping credit spreads hold close to record tight levels. That is despite a flood of new issuance in the last couple of days, including those from German retailer Metro and Norwegian telecoms group Telenor, which have been snapped up.
"We're still something like 20 billion euros, behind year to date," he said. Trading was also relatively subdued ahead of Ascension Day on Thursday when several European countries take a market holiday. Among single names, credit default swaps on British supermarket chain J Sainsbury Plc fell after the company reported a 42 percent rise in underlying profit and said it would retain ownership of its real estate.
There had been concerns in the wake of a failed private equity approach for Sainsbury that the company might look to leverage its balance sheet via a sale and leaseback of its property, but Chairman Philip Hampton scotched the speculation. Five-year default swaps on Sainsbury fell 7 basis points to 52 basis points by 1500 GMT, another dealer in London said.
Elsewhere, credit default swaps on Germany's Degussa, owned by RAG, continued to tighten, falling 3 basis points to 55 basis points, the second trader said. The CDS fell on Tuesday after Germany's ruling coalition agreed that RAG should be sold as a complete company, dismissing the idea of a break-up. Germany's Lanxess has said it is interested in buying Degussa.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 42.4 basis points more than similarly dated government bonds at 1510 GMT, 0.7 basis points lower on the day.