European credit spreads tightened on Friday, supported by US employment data and a plan to rescue homeowners, but the rally was limited as banks used the market to hedge loan exposures going into year-end.
By 1555 GMT, the iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 346 basis points, according to data from Markit, 8 basis points tighter versus late on Thursday.
Banks in recent weeks have turned to the credit default swaps market, particularly at the short-term end of the yield curve, to hedge exposures on their loan books, said Jochen Felsenheimer, head of credit strategy for Unicredit (HVB).
"If you look at the equity markets, they have reacted much more strongly to the news," he said. "All this hedging activity is limiting potential spread tightening."
One sign of that hedging is the fact that the yield curve on the iTraxx Europe index flattened in recent weeks, and particularly in the past few days, he said.
The five-year investment-grade iTraxx Europe was at 54.25 basis points, according to Markit, 1.25 basis points narrower. The 10-year iTraxx Europe was at 67.5 basis points. "Everything we are seeing right now for the iTraxx paints a completely different picture than what we see on the cash side," Felsenheimer said.
The iBoxx index of spreads on investment-grade corporate bonds was at about 80 basis points, which he said was a more than four-year high. The five-year iTraxx Europe was still about 20 basis points below its August highs.
European stocks rose and US stocks were little changed on Friday after US data showed 94,000 new jobs in November, slightly higher than expected but leaving expectations unchanged for an interest rate cut next week.
US share indexes held on to the previous two days of strong gains, boosted by the government's announcement of a plan to help as many as 1.2 million homeowners meet their mortgage payments.
In the single name market in Europe, five-year credit default swaps on Air France-KLM remained sharply wider at 92.5 basis points, a trader said, a day after the airline offered to buy troubled Alitalia, which is losing a million euros a day.
Five-year CDS on Diageo Plc widened 3 basis points to 56.5 basis points, the trader said, as the world's biggest alcoholics drinks maker plans to sell bonds in the US market.