European credit indices hit record tight levels

Strong demand for novel structured credit products, and a supportive economic backdrop, helped push European credit indices to record tight levels on Wednesday.
At 23.5 basis points, 0.5 basis points tighter on the day, the iTraxx Europe index of 125 key investment-grade credit default swaps hit its tightest level ever, said Bob Janjuah, chief credit strategist at the Royal Bank of Scotland.
The iTraxx Crossover index, made up of mostly "junk"-rated default swaps, tightened 4 basis points to 244 basis points, a trader said - the tightest since the current series debuted on September 20, since when it has tightened by about 15 percent.
"It's a combination of factors - good earnings, low bond yields, crude oil has come off the highs, and there is a strong outlook for a soft landing in the US," Janjuah said. "But the key factor is structured credit, with the new CPDO structure squeezing the Europe Main index in particular."
Constant Proportion Debt Obligations (CPDOs), introduced in August, are a new index-based structured credit product that pay a fixed return. The market shrugged off data which showed growth in US factory activity slowed more than expected in October - strengthening the view the next move in US interest rates could be a cut by the Federal Reserve.
The Institute for Supply and Management's figures on US manufacturing in October was posted at 51.2, below economist's median forecast for a slight rise to 53. "We don't think inflation is a big risk for credit investors any more," said Willem Sels, credit analyst at Dresdner Kleinwort. "And there is always a lag before credit markets react. Credit investors want to see a lot of evidence very quickly before they change their minds and think they need to get out."
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 51.4 basis points more than similarly-dated government bonds at 1611 GMT, 1.1 basis points more on the day.
In the primary market, Saint-Gobain, the world's biggest supplier of building materials, took advantage of a buoyant sterling bond market to sell larger-than-expected 600 million pounds of 10- and 18-year bonds.
Saint-Gobain's two 300-million-pound bonds were both priced to yield 5 basis points less than original spread guidance, with the 10-year bond yielding 100 basis points over the 2015 UK government gilt, and the longer bond 125 basis points over the 2025 gilt.
The new bonds rallied once they started trading, with their spreads tightening 3 to 4 basis points, a trader said. Stephen Snowden, who manages Old Mutual's 718-million-pound Corporate Bond Fund in London, said the firm bought some of the 10-year bonds, which were "cheap" compared to Saint-Gobain's credit default swaps. "The market is red-hot at the minute and there's huge demand for new issues," Snowden said.