Bonds: iTraxx wobbles amid subprime fears

European credit markets pared earlier losses on Monday, with some support from US home sales data, although worries lingered about the subprime market in the United States. The iTraxx Crossover index, made up of 50 mostly "junk"-credits, was about 7 basis points wider at 221.5 basis points by 1440 GMT, clawing back from some of the losses made earlier.
The iTraxx, a proxy for risk appetite, had earlier widened to 227 basis points amid continued concern over the US subprime mortgage crisis. Figures showing that US existing homes sales in May came in near analysts' forecasts eased worries about the health of the sector at the heart of the subprime debate.
"The market was nervous ahead of the data, but it was in line, which has been supportive of spreads," a trader said. A higher opening on Wall Street also helped sentiment, with the Dow Jones industrial average up 55 points at 13,415 points by 1450 GMT. The yield on benchmark US 10-year Treasury notes also dipped, alleviating concerns about higher borrowing costs.
Interest rates will remain in focus ahead of the US Federal Reserve's rate-setting meeting on Thursday, although the fed funds rate is expected to remain unchanged.
Economists are leaning towards US borrowing costs holding at 5.25 percent for the rest of this year at least as inflation pressures persist. Previous expectations had been for the Fed to cut rates to cushion an anticipated economic slowdown.
A near collapse in two Bear Stearns hedge funds linked to the US subprime mortgage market has injected more cautiousness into an already nervous market, with fears focused on whether there could be other similar funds in trouble.
Bear Stearns, the fifth-largest US investment bank, said on Friday it would provide up to $3.2 billion in financing to a struggling hedge fund. The move was the biggest hedge fund bailout since Wall Street's 1998 rescue of Long-Term Capital Management.
Elsewhere, retailer Sainsbury was the centre of renewed bid speculation. Five-year credit default swaps on Sainsbury were 5 basis points wider at 73.5 basis points, said a second trader. "There is talk that the Sainsbury family have sold out," he said. Sainsbury, in which Qatar's royal family raised its stake to 25 percent earlier this month, declined to comment.
Hanson CDS, meanwhile, moved 4 basis points tighter to 26 basis points by 1505 GMT, a third trader said "on a positive research note rehashed from an investment bank".
In an otherwise subdued primary market, Arcelor Finance set guidance on a planned dual-tranche euro benchmark bond. Books are expected to remain open overnight. Guidance for the five-year 750 million euro bond has been set at midswaps plus low to mid-30s, the bank said. Guidance for the 10-year tranche of the same size has been set at midswaps plus mid-60s.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 42.7 basis points more than similarly dated government bonds at 1540 GMT, 0.9 basis points up on the day. The 10-year euro swap rate was 4.892 percent.