The iTraxx Crossover index widened sharply early on Tuesday as European stocks dropped, China's stock market fell over 8 percent and former Federal Reserve Chairman Alan Greenspan said a US recession was possible by the end of the year.
By 0830 GMT, the index, made up mostly of "junk"-rated credits and viewed as a proxy for risk appetite, was 7.5 basis points wider at 187.5 basis points, dealers said. The index has widened nearly 20 basis points from the record low around 168 basis points it hit late last week after a virtually non-stop rally since the start of the year.
"Everyone is rushing for the door, as we inevitably knew they would do," said one trader. Another trader added: "Chinese stocks were down ... and we expect the US to open weaker after Greenspan said the US may be in recession by year end."
The Shanghai Composite Index fell 8.84 percent, its biggest drop in a decade, as profit-taking by local funds snowballed. The index soared 130 percent last year. Greenspan said it was "possible" the US economy might fall into recession by the end of the year, Dow Jones news service reported, quoting him as saying that stabilising profit margins were an early sign that the economy was in the later stages of the cycle.
Investors will on Tuesday focus on reports of US durable goods orders and consumer confidence for clues on the strength of the world's largest economy. But several dealers said they thought the current move was not a turning point for the market, and came partly as a reaction to the strong gains seen since the start of the year. Five-year credit default swaps on Valeo traded 4 basis points wider, bid at 71 basis points, said a trader.
In the primary market, US consumer products maker Procter & Gamble plans to issue $4 billion worth of bonds in three parts denominated in euros and dollars, a market source said on Tuesday. The sale will comprise a minimum 2 billion euros ($2.63 billion) of 10- and 20-year bonds and a "benchmark"-sized 30-year dollar bond, the source said.
In underlying government bond markets, the yield on the interest rate sensitive two-year Schatz was 3.909 percent, 1.2 basis points more on the day. The 10-year Bund yielded 3.970 percent, 2.4 basis points less. The 10-year euro swap rate was 4.194 percent.