European credit spreads widened on Tuesday on fears of interest rate hikes, although they recovered partly later in the day after US share market declines were smaller than feared. By 1534 GMT, the Markit investment-grade iTraxx Europe index was at 92.5 basis points, according to Markit data, 2.5 basis points wider versus late on Monday.
The iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was 11.5 basis points wider at 498.5 basis points. Earlier in the day, it had climbed above 500 basis points for the first time since mid-April.
"These days, the US and European equity markets and the credit markets are pretty much in sync," with equity markets in the lead, said Andrea Cicione, a credit strategist at BNP Paribas.
The Dow Jones industrial average was down by 0.1 percent and the S&P 500 by 0.4 percent. Financial stocks stabilised after falling on Monday in response to comments by US Federal Reserve Chairman Ben Bernanke that the US central bank would act to resist inflation.
The Bank of Canada held its key rate steady at 3 percent on Tuesday and signalled an end to its rate-cutting cycle, surprising primary dealers who had unanimously expected a quarter-point cut. The bank said prices hikes were the primary risk rather than weak economic growth. For the short term, one recommendation from strategists at BNP Paribas is to short the main Europe index and go long on the Crossover, Cicione said.
The Europe index has underperformed Crossover through most of the credit crisis, because it has been the primary hedge for systemic risk and contains a number of financial companies.
Although systemic risk has diminished after the Fed stepped in to rescue Bear Stearns in March, risk is still with the financial sector, he said. As for the Crossover index, "risk will spread to other, non-financial companies, but that will take a little longer," he said. Among individual names, five-year credit default swaps on Alliance Boots rose by 24.5 basis points to 632.5 basis points, according to data from Markit.
The CDS earlier reached 650 basis points after Britain's biggest pharmacy chain said it would continue spending heavily to expand into new countries and product lines, a trader said.