European corporate bonds drifted lower in late trade on Friday, reversing earlier gains, as a report of weaker consumer sentiment in the US fuelled speculation that recent declines have further to run. The iTraxx index of crossover credits, rated on the cusp of investment grade, ended the day bid 20 basis points wider at 407 basis points after a University of Michigan report showed weaker-than-expected consumer sentiment in the world's largest economy. "We tried to come tighter this morning but the US came in and started selling and the bids dropped out of the market," said a trader in London. "It's been a terrible week."
Corporate bonds have fallen in recent days, while the cost of credit protection has risen, after the fall to junk status of automakers Ford and General Motors last week prompted a sell-off in credit derivatives that led to a minor panic in the wider market.
Equity tranches, the riskiest parts of complex portfolios of credits known as collateralised debt obligations, dropped by as much as five percent on Tuesday as hedge funds and banks dumped investments most exposed to corporate defaults.
The rest of the market responded and the iTraxx crossover index closed 65 basis points wider on the week.
Euro bonds of Ford and General Motors were slightly weaker late on Friday, a trader said, but there was little activity.
"We've kind of ground to a halt...I keep thinking we'll have a major selloff, but it never seems to materialise," he said.
Sentiment remains fragile, however, with the $409 million first-quarter loss at auto parts supplier Delphi Corp, whose main customer is GM, worsening the mood further.
"There's bad news around every corner, not major bad news, but just a relentless stream of negative headlines," the trader said. "The market can't rally."
GM's 8.375 percent euro bonds due 2033 were bid at 72 percent of face value around 1425 GMT, down marginally on the day, the trader said.
Moody's Investors Service late on Thursday cut Ford and its finance arm Ford Motor Credit by two notches to Baa3 and Baa2 respectively. It kept both Ford entities within the investment grade category, but assigned a negative outlook.
Moody's rival S&P cut all four GM and Ford entities to sub-investment grade last week, meaning many investors can no longer hold an estimated $211 billion worth of bonds from the two largest corporate borrowers in the world.
Credit default swaps on German steelmaker Thyssenkrupp rose 10 basis points on Friday, a trader said, after the company posted a weaker-than-expected rise in pretax profit for the second quarter to March.
Five-year protection on the company traded at 130 basis point at 1430 GMT. That means it costs 130,000 euros to annually insure 10 million euros of Thyssenkrupp debt against default.
Earnings before tax rose 27 percent to 445 million euros, but that was short of an average forecast of 498 million from 18 analysts polled by Reuters.
The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 77.1 basis points more than similarly-dated government bonds at 1440 GMT, 0.9 basis points more on the day, and around 6 basis points more on the week.
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