The corporate bond market was firmer on Friday in very light trade the day after the Thanksgiving holiday, and financials ended the week stronger after a week long sell off. The market's slightly positive, though it's largely because there is little trading, said Mirko Mikelic, portfolio manager at Fifth Third Asset Management in Grand Rapids, Michigan.
The benchmark investment grade credit derivative index rallied almost 9 percent to 80.25 basis points, its tightest level in a week, according to Markit Intraday. The high yield credit derivative index rose to 94.45 cents on the dollar, from 94.14 cents at Thursday's close.
"People probably think there's still more trouble ahead for financials," Mikelic said. "There's going to continue to be more foreclosures, more losses and more bankruptcies." Moody's Investors Service said on Thursday that Freddie Mac's credit losses may surpass its historic high, if the US mortgage market deteriorates more than what is forecast by the No 2 mortgage finance company.
News on Thursday that Banque Populaire and Caisse d'Epargne, which together control French bank Natixis, will commit capital to preserve the rating of bond insurer CIFG, however gave a boost to some financials on Friday.
Banque Populaire and Caisse d'Epargne said on Thursday they will "provide the required financial resources" to maintain CIFG's rating. The capital injection is expected to be around $1.5 billion, they said.
Credit default swaps on MBIA Insurance Corp, the insurance arm of MBIA Inc tightened 12 percent to around 266 basis points, or $266,000 per year for five years to insure $10 million in debt, according to Markit Intraday. MBIA has been among the most volatile and actively traded bond insurers on concerns it may be vulnerable to losing its top rating.
Bonds of mortgage lender Residential Capital, meanwhile, gained in the secondary market following a surge on Wednesday when parent finance company GMAC LLC said it would ensure the mortgage unit is able to meet its debt covenants and was also exploring alternatives for the troubled lender. ResCap's 6.282 percent bond due 2008 rose 1.75 cents on Friday to 74.25 cents on the dollar, according to MarketAxess.
In the coming week investors will be focused on housing data as well as gross domestic product to see is the housing weakness is causing a broader growth slowdown, Mikelic said.