European credit spreads crept tighter on Friday in thin volumes ahead of a three-day weekend in the UK, with synthetic credit indexes vulnerable to sharp widening on risks of more negative news in the financial sector.
By 0742 GMT, the investment-grade Markit iTraxx Europe index was at 98.75 basis points, according to data from Markit, 1.25 basis points tighter versus late on Thursday. The Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 564.5 basis points, 0.5 basis points tighter.
The nudge narrower in spreads was partly due to markets reassessing whether a sharp sell-off over the past couple of days was overdone, a trader said. The European index broke the 100 basis points level on Thursday, a key technical mark, and hit its widest point in over a month as a slew of bad news on the financial sector knocked confidence.
A Citigroup report predicted another tough quarter for US bank earnings and growing conviction that mortgage lenders Fannie Mae and Freddie Mac will be bailed out by the US government. Credit strategists at UniCredit (HVB) said the European index is back to where it should be, in the "triple-digit basis point league".
"Synthetic indices are currently trading close to critical levels," said UniCredit strategist Jochen Felsenheimer, adding that 104 basis points on the Europe and 575 basis points on the Crossover indexes have proved to be major support levels. In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 119.1 basis points more than similarly dated government bonds, 0.5 basis points up on the day.
In underlying government bond markets, the yield on the interest rate sensitive two-year Schatz was 4.108 percent, 1.5 basis points higher on the day. The 10-year Bund was steady, yielding 4.175 percent. The 10-year euro swap rate was 4.676 percent.