Corporate credit spreads in Europe headed wider on Friday as a stronger than expected US jobs report kept concerns about higher interest rates alive. Financial markets wiped out the chance of a US Federal Reserve rate cut as data showed US employers added a higher-than-expected 132,000 new non-farm jobs in June. Hiring numbers for April and May were also revised up strongly.
The iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was five basis points wider at 245.5 basis points by 1445 GMT. The mood was expected to remain cautious next week with fears about higher rates persisting.
"Volatility will remain relatively high," said Willem Sels, a credit strategist at Dresdner Kleinwort. "A lot of investors are telling me they are not seeing this as a buying opportunity yet."
Concerns will also remain centred on the US subprime market following the near collapse of two Bear Stearns hedge funds linked to the risky mortgage sector. The worry, Sels said, is that other funds with similar exposure are yet to emerge.
"The fear is that brokers will demand more collateral to be posted if that happens. It's very difficult to assess and that makes people cautious," he said.
Strategists mostly agree this recent sell-off is more focused on worries about credit, and therefore may leave spreads permanently wider. Previous corrections, by comparison, have been sparked by higher rate worries and a sharp fall in Chinese stocks from European credit markets have recovered.
Also of importance next week will be a number of leveraged loans and bond issues still on the agenda, some of which need to be pushed through before mid-July when the market quietens down during the summer. The primary market this week saw British mobile phone retailer Carphone Warehouse cancel its planned 10-year sterling benchmark bond sale citing volatile market conditions, although it said the issue may be reviewed if markets recover.
The Carphone Warehouse bond was unrated, which is relatively rare in the European market. Such issues can be more difficult to sell during volatile periods as they require investors to undertake more credit work than rated deals.
Other deals that lie in the pipeline and may announce guidance next week are a planned benchmark eurobond from French industrial gases group Air Liquide and a 10-year benchmark eurobond from ProLogis European Properties.
Among single name spreads, the cost of insuring debt of high-yield Finnish paper maker M-Real fell. The company said it would sell subsidiary Map Merchant Group Holdings to Anatalis International, a subsidiary of Sequana Capital SA, for 382 million euros.Five-year credit default swaps on M-Real were around 15 basis points tighter at 415 basis points in afternoon trade, having tightened 30 basis points initially.
"While today's news is positive for the company, we maintain our recommendation to buy protection given the challenges still facing M-real," said strategists at SEB.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 44.9 basis points more than similarly dated government bonds at 1435 GMT, 0.2 basis points up on the day.