European credit spreads seesawed on Wednesday, wiping out earlier gains as shares nose-dived again on market talk of more investment bank write-downs and fears that the United States is on the brink of recession.
By 1605 GMT, the Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 482 basis points, according to Markit data, 2 basis points wider than late on Tuesday. The Crossover had swung tighter in earlier trading as Asian stocks rebounded but gradually crept wider, approaching 500 basis points, as European equities continued the week's sharp sell-off and tanked more than 3.5 percent.
The investment-grade iTraxx Europe index was 0.5 basis points tighter at 81.5 basis points. Nonetheless, the movements in credit derivative indexes were less volatile than in the previous two days. "Credit has significantly outperformed stocks today," said Jochen Felsenheimer, head of credit strategy at UniCredit (HVB). "We're still below the 500 level in the Crossover, still 40 basis points below the high from yesterday while stocks are at their lows."
Talk of more writedowns by banks also hit the Tier 1 bonds of German bank names in particular, including Dresdner Bank, a second trader said. A continued hawkish stance and emphasis on inflation risks from the European Central Bank also weighed on sentiment and quashed hopes it might follow in the Fed's footsteps by cutting rates aggressively.
But credit strategists at UBS said that while the Fed's shock emergency 75-basis-point rate cut on Tuesday would be "good for banks and generally good for credit in general" it had not removed all the problems. "It does not increase risk appetite. In fact, it probably just dampens pessimism," said UBS credit strategist Geraud Charpin.
Wall Street expects the Fed to ease benchmark rates again next week at its scheduled policy meeting from 3.5 percent now. Despite the extreme market volatility however, Europe saw its first asset-backed security of the year with a planned 1 billion euro ($1.5 billion) deal from Volkswagen, backed by German auto loans.
That said, guidance on the triple-A rated 934 million euro tranche of the named "Driver Five" deal was set at Euribor plus around 60 basis points, about 20 basis points more than a similar deal brought by Volkswagen Leasing late last year. That higher spread premium was put down to increasing concerns about possible rising defaults.