European credit spreads widened on Friday, but the move was less pronounced than might have been expected as global equity markets moved sharply into the red due to fears over spreading losses linked to US subprime mortgages.
As European stock markets racked up 3-percent-plus losses and US equities opened sharply lower, activity in the credit markets was subdued, many traders said, with one describing the benchmark iTraxx Crossover index as "oddly calm".
By 1440 GMT, the index, made up of 50 mostly "junk"-rated credits, was at 365 basis points, 10 basis points wider than late Thursday, and off a high of around 380 basis points.
"It's very choppy, on thin turnover," said another trader. "But with this equity market, we should be higher on spreads." The investment-grade iTraxx Europe index was 6 basis points wider at 53.5 basis points, underperforming as the index contains a large number of financial names on which spreads have widened in recent sessions.
Some suggested investors were retreating from activity due to the recent volatility, which has seen Crossover move in a 200-basis-point range in the past two weeks. "I think a lot of people have been exhausted by Tuesday, Wednesday and Thursday, especially the tightening we saw on Wednesday, which I think caught a lot of people off guard, and then Thursday when it ratcheted all the way the other way," said Ben Bennett, a credit strategist at Lehman Brothers.
"We're getting so much stuff thrown at us that it's very difficult to have a sober step-back and say 'what does it all mean for the markets?'" he said. "At the moment it feels like it's almost digital: we either get a total banking market meltdown, and all bets are off, or we have a few days where no one actually goes bust and then hopefully we can recover from that," Bennett said.
There was continued debate over the actions of central banks in providing emergency liquidity to the markets. The Federal Reserve stepped in again on Friday and said it would provide liquidity as needed, in a statement similar to that made after the September 11, 2001, terror attacks. The European Central Bank again provided massive liquidity to the market on Friday.
Some argued that the actions of the Fed and the ECB would calm markets, while others said it was a more cosmetic operation that could increase fears that more bad news would emerge. "The central banks are recognising that their efforts to drive out bad lending from the system could have the undesirable effect of cutting off all borrowers regardless of credit quality as banking sector confidence nosedives," analysts at Credit Suisse wrote in a note to clients.
They said that neither household nor non-financial corporates in the euro area looked overborrowed or in poor financial shape, but that the banking sector was an area of weakness.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 61.0 basis points more than similarly-dated government bonds at 1522 GMT, 0.1 basis points more on the day.