European credit spreads tightened on Wednesday, boosted by a rally in US stocks, but trading flows remained low as investors wait for word on the refinancing of more than a hundred billion dollars of short-term debt.
The widely watched iTraxx Crossover index of 50 mostly "junk"-rated credits was seven basis points tighter at 345 basis points, a trader said. The index moved tighter even as European stocks were flat to lower. By 0833 GMT, the FTSEurofirst 300 index was down 1.73 points, or 0.11 percent. The iTraxx Europe index of 125 investment-grade credits was one basis point tighter at 52.75 basis points.
"We might actually see a bit more of a movement tighter," the trader said. "A lot of people were quite short, especially in the last three days." Market sentiment remains fixed on problems in short-term liquidity, eyeing the outcome of both the US Federal Reserve's interest rate decision on September 18 and, more immediately, the refinancing of $139 billion of Euro commercial paper that strategists at Lehman Brothers estimate will expire between now and September 19.
Sponsors of asset-backed commercial paper and structured investment vehicle programmes that use the short-term debt markets are set to meet on Wednesday to discuss ways to restore market confidence.
The International Index Company published the provisional make up of the new Series 8 Crossover and Europe indexes late on Tuesday. The names joining the Crossover include British health and beauty chain Alliance Boots, German cement maker HeidelbergCement AG, Finnish paper and board maker Stora Enso and Italian conglomerate Cir SpA.
The final list will be published on Friday. Italian bank Mediobanca added financial weight to the pipeline through the preparation of a 5-year euro senior fixed-rate bond, to be priced in the near future, sources said.
Meanwhile, guidance was set on German State bank KfW's planned two-year global benchmark dollar bond at midswaps minus 20 to 21 basis points. The bond will be priced later on Wednesday.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 79.8 basis points more than similarly-dated government bonds at 0828 GMT, 1.3 basis points more on the day.
In underlying government bond markets, the yield on the interest rate sensitive two-year Schatz was 3.944 percent, 5.8 basis points more on the day. The 10-year Bund yielded 4.112 percent, 0.01 basis points less. The 10-year euro swap rate was 4.505 percent.