European credit spreads widened further on Friday, rounding off a week of poor performance, as a laundry list of worries weighed on the market, battering investor confidence.
Poor bank earnings, a surging oil price, falling stocks, and doubts over the efficacy of a planned fund to help structured investment vehicles (SIVs) all conspired to put renewed pressure on the corporate debt market, where the buoyant mood seen early in October has been erased.
By 1458 GMT, the iTraxx Crossover index, made up of 50 mainly "junk"-rated credits, was at 334 basis points, 20 basis points wider on the day, according to data from Markit. The investment-grade iTraxx Europe index was 3.5 basis points wider at 38.5 basis points, a sizeable move.
The Crossover is some 65 basis points wider since early Monday, while the Europe index is 10 basis points wider. The Dow Jones industrial average dropped over 200 points, or just over 1.5 percent, by 1504 GMT. "We've had Wachovia today and they've missed their targets as well, and Bank of America is still reverberating around the market. Then there's the SIVs that have indicated they won't be able to meet their payments," said Jeroen van den Broek, credit strategist at ING in Amsterdam.
"On top of that it's been proved over the last week or so that the housing market is still very much a moving target: $23 billion downgraded by S&P of RMBS that was originated only this year."
Meanwhile, asset-backed commercial paper outstandings declined faster this week than last week, and there has been further bad news on US homebuilders, van den Broek said. "It's a rather depressing picture, actually," he said.
Traders said activity was thin but that market psychology had flip-flopped. "Two weeks ago, everyone was looking at a buy opportunity. Now it's a sell opportunity. The mood is changing very quickly. The news is still the same. There is nothing that's really new but the psychology has really turned," a trader in London said. "Liquidity is still poor in the street ... We easily could go wider," he said.
ING's van den Broek said he thought the Crossover index remained overvalued despite the widening seen this week, with the investment-grade Europe index having actually performed worse.
After a strong week of supply, new euro and sterling bond issuance slowed on Friday. With school holidays in the UK next week, new bond sales may be slow to emerge. But the high-yield market will see a roadshow for British-based oil and gas explorer Melrose Resources Plc, which plans to issue a 250 million euro bond that will be the first high-yield euro deal since the summer.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 71.0 basis points more than similarly-dated government bonds at 1513 GMT, 0.8 basis points more on the day.