European credit spreads were modestly wider in thin trade on Monday but recovered partly from earlier wides as oil prices declined on easing fears Hurricane Gustav would produce a Katrina-scale disaster, a trader said. By 1443 GMT, the investment-grade Markit iTraxx Europe index was at 100 basis points, according to data from Markit, 1 basis point wider than late on Friday.
The Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was 5 basis points wider at 550 basis points, compared with 556 basis points earlier in the day. Earlier, by 0830 GMT, the investment-grade Markit iTraxx Europe index was at 101 basis points, according to data from Markit, 2 basis points wider versus late on Friday.
The Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was widened 11 basis points to 556 basis points. European spreads outperformed shares, which took a dive after Commerzbank agreed to buy Dresdner Bank from Allianz. The cost of insuring debt against default of all three German financial firms rose slightly, though in line with broader markets moves, traders said.
Five-year credit default swaps on Commerzbank widened around 3 basis points to 84.5 basis points, one trader said, with spreads on Dresdner Bank and Allianz widening similar amounts. Traders said spreads had already priced in a possible merger: "The market was already expecting it, and liquidity is already poor," the first trader said.
Shares in Commerzbank slid more than 7 percent. Putting a damper on sentiment was Britain's Finance Minister Alistair Darling, who said in an interview with the Guardian newspaper on Saturday that the nation's economic downturn could be the worst for 60 years. Jim Reid, a credit strategist at Deutsche Bank, wrote in a note to clients: "Britain has prospered disproportionately from banking riches, a consumer debt binge and the excessive housing bubble.
"It shouldn't therefore take much detailed analysis to work out that the hangover from such a party could be potentially severe." With the US market closed for Labour Day, major data flows will be thin on Monday, picking up as the week progresses, and ending with non-farm payrolls on Friday.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 123.6 basis points more than similarly dated government bonds, 1.7 basis points more on the day. In underlying government bond markets, the yield on the interest rate sensitive two-year Schatz was 4.031 percent, 8.7 basis points less on the day. The 10-year Bund yielded 4.132 percent, 4.1 basis points less. The 10-year euro swap rate was 4.620 percent.