European credit spreads rallied for a second day on Wednesday on hopes that a bank rescue plan for troubled US bond insurer Ambac Financial Group would be announced soon. The hopes for Ambac outweighed more bad news about the world's biggest economy, as data showed US private employment fell unexpectedly in February, for the first time in nearly five years.
"We were getting good vibes because of reports that a recapitalisation of Ambac was imminent. That's probably helped the market more than the bad economic numbers have damaged it," UBS credit strategist Geraud Charpin said.
Banks negotiating a rescue of Ambac - which would allow the company to keep its top credit ratings - hope to finish hammering out a deal on Wednesday, CNBC reported.
By 1600 GMT the Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credit default swaps, was at 582 basis points - 14 basis points tighter versus late on Tuesday, and its lowest since Thursday. The investment-grade iTraxx Europe index tightened 3.25 basis points to 126.75 basis points, according to Markit data.
US private employers unexpectedly cut 23,000 jobs in February, a report by private employment firm ADP Employer Services said. A Reuters poll of 30 economists had predicted a rise of 20,000 jobs. Charpin said investment-grade credit spreads were already "discounting a very bad economic scenario" so the new figures had little impact.
The primary market - almost closed this year as high spreads have deterred issuers - absorbed almost $3 billion of new euro and sterling bonds from British American Tobacco (BAT). BAT sold a 7-year, 1.25 billion euro ($1.9 billion) bond at mid-swaps plus 180 basis points, and a 16-year, 500 million pound ($989.7 million) bond at gilts plus 270 basis points. Both bonds priced at the tight end of initial guidance.
CDS on BAT rose about 10 basis points to 123 basis points, the trader said. Elsewhere, 5-year CDS on British broadcaster ITV narrowed around 10 basis points to 291 basis points after the company said its turnaround plan was on track.
And CDS on Dutch bank Rabobank edged 1.25 basis points tighter to 78.75 basis points, after it posted a 13.5 percent rise in net income despite writedowns.