Volatility has come down quite a bit during the week. Money market tensions also seem to have continued to ease. In the primary market there was some issuance during the week and we foresee more issuance next week. Central banks in Europe have lowered interest rates while lending standards in the US continue to tighten. Overall, we are cautiously optimistic that the situation in the credit market will improve in the months ahead.
After the strong rally we saw last week, this week has been more stable. Also, volatility has abated somewhat and, provided there are no major negative surprises in the pipeline, we believe that the primary market is set for a period of some – if not a lot of – activity in the coming weeks.
On Thursday we saw rate cuts from the ECB, the Swiss National Bank, the Bank of England and the Danish central bank. The 50bp cut by the ECB was expected but the 150bp cut by the Bank of England was much more than anticipated and highlights the difficulties for the British economy. The rate cuts had little effect on the credit market.
Currently, the investment grade index, iTraxx Europe, trades at 140bp, down from 157bp last Friday. The high yield index trades at 760bp, down from 794bp last week, and thereby investment grade has outperformed. Volatility, measured by the VIX volatility index has fallen markedly during the week, cf. graph below. Money market tensions seem to be easing further and we are therefore cautiously optimistic on the outlook for credit spreads in the forthcoming weeks and months, although fundamental economic data remains very weak. Consequently, the road to salvation is bumpy and volatile.
