The European corporate bond market saw a calmer session on Friday compared with the rest of the week, with most prices holding on to gains registered in early trading. Fears remain, however, that next week could see another rollercoaster ride as the end of the month - which will see changes to bond indexes and could lead to portfolio shifts - approaches. Some also fear that hedge funds could yet have to sell bonds to meet investor redemption calls. "There's worries about it, but we won't know for sure till the month end," said one trader. "Volatility is set to continue."
This week, the iTraxx Europe index of 125 investment-grade credit default swaps has moved in a range between 48 and 60 basis points, with intraday swings sometimes exceeding five basis points - big moves for a market used to moves of one to two basis points.
The iTraxx Crossover index, meanwhile, has moved in a 90-basis-point range, hitting a high around 470 basis points mid-week before snapping back in sharply.
That movement has deterred many end investors from getting involved in the market, although a couple of corporate issuers braved the volatility this week to place large bonds.
"Real money has been sidelined and, we believe, will be better buyers of credit once we get a sustained period of stability," Suki Mann, a credit strategist at SG, said in a note to clients.
Others agreed. "Will investors sell into this rally or buy into the strength? We suspect the latter given the oversold nature of the market, positive indicators and encouraging activity in the primary market," said analysts at BNP Paribas. "However, by no means are we indicating that this rally will be smooth or sustained."
Friday was calmer, however, with the iTraxx Europe two basis points tighter at 48.5 basis points by 1400 GMT, a trader said.
The cost of credit protection on telecommunications bonds declined for a third straight day, as investors looked to boost risk-exposure, another trader in London said.
Five-year credit default swaps on Telecom Italia were bid three basis points tighter at 70 basis points, and on France Telecom were two basis points tighter at 50 basis points. "The whole market is looking stronger and telcos are moving in line," said the trader.
Autos too held onto gains, another trader said, after Fitch Ratings cut its ratings on Ford Motor Co late on Thursday but left the company two notches above "junk" status, meaning the company's bonds are set to remain in key indices.
The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 75.4 basis points more than similarly-dated government bonds at 1445 GMT, 1.5 basis points less on the day.
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