European credit derivative indexes tightened on Wednesday on the prospect of further economic stimulus packages from the United States and other governments, while the new issue market returned with a vengeance. By 1545 GMT, the investment-grade Markit iTraxx Europe index was at 164.25 basis points, according to data from Markit, 2.5 basis points tighter versus late on Tuesday.
The Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was at 978.25 basis points, 17.25 basis points tighter. "The main driver is the economic stimulus packages, which provide some hope of recovery," said Tim Brunne, a credit strategist with UniCredit (HVB).
Economic data and forecasts by the US Federal reserve and other economists, however, continued to point to a steep economic downturn, he added. The credit market rally continued even though European stock markets fell for the first time after six days of gains. The primary bond market was teeming with new issues on Wednesday, with E.ON, Volkswagen Financial Services, GDF Suez and Schneider Electric leading the corporates.
Government-backed bonds also proved prolific with new issuers including SFEF, KfW and Commerzbank. "This has been a positive indicator since November. The new issuance market is functioning, with large spreads of course, but paper is still being sold," Brunne said. However, it was not all good news.
Late on Tuesday, Petrochemical giant LyondellBasell ended days of speculation and filed for Chapter 11 bankruptcy protection, raising fears UK sector rival Ineos may suffer a similar fate. Credit default swaps (CDS) on Ineos are bid at 75 percent and offered at 85 percent a trader said, making it the next most costly after LyondellBasell in the iTraxx Markit Crossover Index.