European credit spreads tightened on Thursday, boosted by forecast-beating results from Goldman Sachs that eased worries about how investment banks have performed in the recent financial market crisis.
By 1440 GMT, the new Series 8 iTraxx Crossover, widely watched as a gauge of European credit risk sentiment, which started trading at 0700 GMT, was at 325 basis points, a trader said. The index, which is made up of 50 mostly "junk"-rated credits, had traded at 334 basis points in early trading later gradually slid downwards to its current position. "The market is in a very positive mode," a trader said. "It's the Bernanke effect."
Spreads have rallied sharply since the US Federal Reserve, headed by Chairman Ben Bernanke, cut interest rates by 50 basis points on Tuesday, more than expected. US investment bank Goldman Sachs is one of four major financial houses - the others being Lehman Brothers, Bear Stearns and Morgan Stanley - to release third-quarter results this week. The figures have been mixed but credit markets have weathered them well.
Five-year credit default swaps on Goldman Sachs and Lehman Brothers tightened roughly 5 basis points after their earnings reports, whilst those on Bear Stearns Cos were little changed. "Lehman went fairly well, Goldman was really good and Morgan Stanley's were not that bad," said Juan Esteban Valencia, a credit strategist at Societe Generale. "So maybe the damage is not going to be that hard."
Elsewhere, CDS on Britain's J Sainsbury were 20 basis points wider at 197.5 basis points after Qatari-backed investment fund Delta Two was allowed access to the retailer's books in the latest stage in a 10.6 billion-pound take-over battle. In the primary market, a second busy day of issuance kicked off with German utility E.ON's planned two-part euro bond.
Strong demand for the bond, consisting of a five-year and a 10-year tranche, led it to be increased to 3.5 billion euros from 2.5 billion. Books for E.ON's deal - a five-year 1.75 billion euro bond and a 10-year euro bond of the same size - were almost four times oversubscribed at about 12 billion euros, a banker familiar with the deal said.
A similar story played out for Svensk Exportkredit's three-year global bond. The export finance agency, owned by the Kingdom of Sweden, upped the bond's size to $1.25 billion from $1 billion to meet heavy investor demand.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 77.1 basis points more than similarly dated government bonds at 1548 GMT, 1.7 basis points less on the day.