European credit spreads were volatile on Thursday, paring gains on uncertainty about the future of the investment banking industry as Morgan Stanley became the latest bank to seek a buyer for its business. By 1530 GMT, the investment-grade Markit iTraxx Europe index was at 134 basis points, according to data from Markit, 8 basis points tighter versus late on Wednesday.
The Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 611 basis points, 27 basis points tighter. Morgan Stanley was in deal talks with US regional banking powerhouse Wachovia Corp and the negotiations have advanced to a more formal stage, a source familiar with the firm's plan said.
"AIG may have been saved but other major bank counterparties have fallen by the wayside or are threatened with extinction," said Suki Mann, a credit strategist at SG CIB. Credit defaults swaps (CDS) on five-year senior HBOS debt were about 150 basis points tighter on the day at around 260 basis points, traders said.
Five-year senior CDS on Lloyds were about 20 basis points wider at around 210 basis points, according to one trader. The Markit iTraxx five-year senior financials index was at about 135 basis points, 10 basis points tighter on the day, traders said. The five-year subordinated index was about 35 basis points tighter at 265 basis points.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 157.3 basis points more than similarly dated government bonds, 2.3 basis points wider on the day.
In underlying government bond markets, the yield on the interest rate sensitive two-year Schatz was 3.661 percent, 9 basis points more on the day. The 10-year Bund yielded 4.036 percent, 5.6 basis points more. The 10-year euro swap rate was 4.765 percent.