The investment-grade European credit index reached a new record wide on Thursday as worries about hedge fund failures and the economy overwhelmed the impact of a Federal Reserve effort to inject liquidity into the market.
By 1640 GMT, the Markit iTraxx Europe index was at about 159 basis points, according to data from Markit, 13 basis points wider versus late on Wednesday. It traded as wide as a record 163.75 basis points. The Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at about 623 basis points, 28 basis points wider on the day.
Spreads had narrowed on Tuesday and Wednesday after the Fed and four other central banks announced a co-ordinated effort to allow financial firms to use securities backed by home mortgages as collateral for loans.
Hedge fund Carlyle Capital Corp, an affiliate of US-based buyout firm Carlyle Group, defaulted on about $16.6 billion of debt and said it expected lenders to seize its remaining assets. "We are in a vicious spiral of unwinding years of increasing leverage in the space of a few weeks," said Andrea Cicione, a credit strategist with BNP Paribas.
Falling prices hit a fund like Carlyle Capital with 32 times leverage, creating selling pressure that hits a fund with 25 times leverage and so on. "It's impossible to say where the end level will be," he said. Credit analysts and strategists said the Fed move was an emergency measure and would not bring the market to a turning point.
"The Fed is able to provide the market with timely limited relief rallies, but all the implemented measures (and there have been a lot!) have not had a lasting effect, with the half-life of positive market reactions declining over time," credit strategists at UniCredit (HVB) said in a note to clients.
Fears of recession and inflation came to the fore as gold hit a record high above $1,000 an ounce, oil reached an all-time peak over $110 a barrel, and the dollar sank to a 12-year low against the yen and an all-time low against the euro.
Among credit default swaps that took a hit on Thursday, industrials were around 30 basis points wider, a trader said. That included French engineering firm Alstom, which traded at 165.5 basis points by 1520 GMT, the trader said, about 20 basis points wider on the day.
Other sectors taking a beating were consumer goods companies, which were up about 20 basis points across the board, and retailers up about 30 basis points, the trader said. Adecco, the world's largest staffing firm, also widened 30 basis points to 222.5 basis points, the trader said.