European credit indexes tightened on Monday as European equities moved into positive territory and government bond yields showed less volatility than in recent sessions. After widening out sharply at the end of last week, the iTraxx Crossover index, made up of 50 mostly "junk"-rated credits and viewed as a barometer for risk appetite, moved tighter again.
"We're definitely calmer," said one high-yield trader. "We've come back about half-way from the wides." By 1405 GMT, the iTraxx Crossover index was at 203 basis points, 4.5 basis points lower on the day, and down from a high level of 218 basis points hit on Friday. A week ago, the index was trading around 190 basis points.
The trader said the market now needed a period of stability, particularly in government bond yields, in order to maintain these gains. Analysts at Dresdner Kleinwort said the Crossover index had been hardest hit in the credit markets due to its close correlation with equities, and that other segments of the market could end up being relatively unaffected.
"Most investors expect only a small correction in credit, especially for cash bonds. A bond yield spike is not usually a big problem for credit spreads," said Willem Sels, credit strategist at Dresdner Kleinwort, in a note to clients.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 42.0 basis points more than similarly dated government bonds at 1445 GMT, 0.1 basis points more on the day and little changed from levels seen since mid-May.
"We expect further short-term volatility, but the negative effects of this spike in the longer run will depend on how people perceive the implication of higher yields for the US consumer, housing and stock markets," Sels said. Analysts at SG said the Crossover could retest last Friday's levels, but they would sell protection if it reached 210 basis points.
"We would be sellers of protection because we believe that, despite the jitters last week, the fundamental story for credit is still bullish," said credit strategist Guy Stear. In single names, the cost of insuring UK utility Centrica's debt against default retreated from the day's highs to be up just 1 basis point at 14 basis points by 1335 GMT, a trader said.
Centrica's CDS had traded as high as 18 basis points earlier on Monday after Alexander Medvedev, deputy chief executive at Russian gas export monopoly Gazprom, said on Sunday the company was near to closing a deal to increase its market presence in Britain.
But a spokesman for Gazprom said on Monday the Russian state-controlled company was not planning a take-over of Centrica, prompting a rally in Centrica's CDS.
In primary, Italian power company Enel is set to dominate the week with a bond sale worth billions of euros to help fund its joint purchase of Spain's Endesa.
The company agreed maturities for the five-part bond sale, a financial source close to the deal said. In sterling, there will be a 12-year and a 30-year bond, both with fixed rates, the source said. In euros, there will be a 7-year floating-rate note, a 10-year euro fixed-rate bond and a 20-year euro fixed-rate bond, the source said.
The pipeline continued to swell, with Austrian energy company Verbund and German mechanical engineering firm Voith AG signing up for euro deals. Meanwhile, Britain's Rexam Plc, the world's biggest drinks can maker, plans to sell 500 million pounds worth of hybrid bonds in euros to help finance its acquisition of O-I Plastic Products from Owens-Illinois.