Europe's main credit default swaps index reached its tightest levels in 20 months on Monday on rising demand for cash bonds and stocks, while 2010's first high-yield bonds and asset-backed securities came to market. "The big story is the spread tightening", said Suki Mann, a credit strategist with SG CIB.
"This is an illiquidity-fuelled savage tightening in credit spreads". The price on the Merrill Lynch Euro High-Yield index jumped to a more-than-two-year high of 91.02 on Friday from just under 87.5 at the close of 2009. The Markit iBoxx Euro HY Core index has risen to 111.94 from 108.31 year-to-date on a price return basis, while the index asset swap market has also tightened to 507.5 from 540.6, according to Markit data.
That compares with a price of 68.54 at year-end 2008. Meanwhile, the spread on the Merrill Lynch Pan-Europe broad market index tightened to 65 basis points on Friday from 71 basis points on December 30. The CDS indexes also were pushed lower on Monday by a rally in stocks, Mann said. European shares hit a new 15-month high in early trade after data showing strong Chinese exports and imports boosted optimism on economic growth.
By 1233 GMT, the investment-grade Markit iTraxx Europe index was at 64.5 basis points, according to data from Markit. That is 2.75 basis points tighter versus late on Friday, according to data from BGC Partners and the lowest level since May 2008. The Markit iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, which earlier reached a fresh two-year low at 378 basis points, was trading 16 basis points tighter at 379 basis points.
"We think the rally in risk assets has legs in it yet," Mann said in a note. "The pace will slow - it simply has to, but barring a catastrophic collapse in the stock markets, cash credit remains well positioned to tighten - more steadily we think, from now on." As for new issues, Fresenius Medical Care and Fiat came to market with new bonds on Monday.
These are higher-quality high-yield names that do not test the market, Mann said. Both are rated toward the high end of speculative grade at BB by Fresenius and BB+ for Fiat. Manchester United, which is unrated but seen as a high-yield borrower, plans to roadshow a two-part dollar and sterling bond this week. Volkswagen's Globaldrive Auto receivables financing arm has launched the first 300 million euro asset-backed security, backed by auto loans.
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