European credit derivative indexes tightened relatively sharply on Tuesday, as an upswing in equity markets and falling volatility helped reverse Monday's widening. By 1600 GMT, the investment-grade Markit iTraxx Europe index was at 166.75 basis points, according to data from Markit, 11 basis points tighter versus late on Monday.
The Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 995.5 basis points, 47.25 basis points tighter. European shares gained for the sixth consecutive day while US shares opened up, lifted by plans for a fresh government stimulus package and hopes for the new Obama administration.
"Given the breadth of the recent move in equities and the coming down of the VIX (volatility index), with the added Obama-coming-into-office factor, there is potential for some follow-through in the short term that would act to support credit spreads," credit strategists at BNP Paribas wrote in a note to investors.
Petrochemical giant LyondellBasell remained locked in talks with creditors on Tuesday as it hovered near bankruptcy two days after a deadline to renegotiate terms of its heavy debt load. The bond market had sent its notes down to just 4 percent of face value.
Five-year senior credit defaults swaps on UBS were about 25 basis points tighter at 185 basis points, despite speculation in equity markets that the Swiss bank may issue a profit warning, a trader said. Its shares were down 1.5 percent.
UBS CDS tightened more sharply than the broader Markit senior financials index and other financial CDS, which were 10 to 15 basis points tighter on average, the trader added. Meanwhile, data released earlier on Tuesday showed service sector activity in the United States contracted less severely than expected in December while in the eurozone activity sank to a record low, pointing to a deep recession.