European credit markets plunged on Thursday, sending tremors through equities and government bonds, as a cocktail of fears about leveraged buy out funding, US housing and hedge fund troubles pushed the widely-watched Crossover index through 400 basis points.
By 1439 GMT, the index was at 401 basis points, 36 basis points wider on the day, after disappointing new US home sales data for June, after trading as wide as 402-403 basis points, a trader said. The index is some 210 basis points wider than in mid-June, the equivalent of more than eight quarter point central bank rate hikes in just six weeks, and its widest since May 2005.
Wednesday's delays of some $22 billion worth of loans backing the buyouts of British health and beauty chain Alliance Boots [AB.UL] and US carmaker Chrysler were further blows to an already battered corporate debt market. They compounded news overnight that a second Australian hedge fund had been hit by the crisis in the US subprime mortgage market.
"We're watching the slow-motion suicide of the capital markets," said a second trader. He said there was no end in sight to the widening, with analysts constantly coming up with new forecasts of where the index could go, with 450, 475 and 500 basis points all listed as possible.
A third trader said the housing data was disappointing, saying: "It's just adding to the negative press concerning the whole market. It's driven by fear at the moment ... It's gone beyond the realms of rationality."
Analysts at independent research firm CreditSights offered little comfort. "The growing crisis has already claimed an impressive list of primary market victims and in the weeks and months ahead we expect the steady drop of bad news from the subprime sector to continue to drain liquidity from the system," they wrote on Thursday.
"All of the difficulties that have driven spreads wider in recent weeks - subprime defaults, ratings rethinks, higher correlation etc - are not about to fade away any time soon." Simon Ballard, credit strategist at ABN Amro Asset Management, said the market was worried that problems in the subprime market will spillover into the broader economy.
"That is what we have seen recently with the Countrywide announcement and similarly with the hedge fund exposures and withdrawals of liquidity that we've seen," he said. "That's been very negative and still has much further to run over the next few months."
"The market is now assuming the Crossover will trade north of 400. Once we get to the 430-450 mark, then the market will start to eye value but at the same time we will need clarification on the subprime, on leveraged loans getting done and on what is happening to equities," Ballard said.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 55.5 basis points more than similarly-dated government bonds at 1427 GMT, 2.1 basis points more on the day.