Fresh euro bond supply pushed European credit spreads slightly wider on Wednesday, traders said, despite stocks making gains partly on the back of stronger-than-expected US durable goods data. By 1440 GMT, the investment-grade Markit iTraxx Europe index was at 102 basis points, according to data from Markit, 1 basis point wider versus late on Tuesday.
The Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was 2 basis points wider at 564 basis points. Primary markets extended a strong run in the previous session, with news of a two-part benchmark euro bond from cigarette maker Philip Morris. New euro bonds from General Electric and German utility E.ON on Tuesday boosted issuance in an otherwise largely stagnant month.
"We are slowly widening ... because of a lot of liquidity has come into the market with new issues," one trader said, adding that he expects volumes to remain high with many coming issuers under pressure to issue new debt. "The pipeline for the next half year is going to be huge, so I really think that could at least keep us at the wide levels."
Credit derivative indexes widened sharply on Tuesday, as the UK market returned from a three-day weekend and caught up with the sell-off in stocks. The more negative tone, which simmered down on Wednesday, was driven by continued concerns on the financial sector about writedowns, capital shortfalls and exposure to US mortgage lenders Fannie Mae and Freddie Mac.
Traders are expecting trading volumes to remain subdued for the remainder of the week ahead of the US Labour Day holiday on September 1. Among earnings reports, shares in UK homebuilder Taylor Wimpey sank more than 15 percent after it revealed a slump in first-half profit and said it was scrapping its dividend. But the company's 2019 sterling bonds were relatively unchanged, bid at about 51 percent of face value, a trader said.
The company's bonds plunged last month after it said it had failed to raise fresh equity, required to avoid problems with its bank debt covenants next year. In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 122.1 basis points more than similarly dated government bonds, 1.3 basis points up on the day.
In underlying government bond markets, the yield on the interest rate sensitive two-year Schatz was 3.961 percent, 2.2 basis points lower on the day. The 10-year Bund yielded 4.110 percent, flat on the day. The 10-year euro swap rate was 4.643 percent.