The successful reopening of the primary market for non-financial issuers is good news. A tightening in the last few days did not prevent CDS indices from ending wider than last week. Money markets seem to be on the right track, which we believe will benefit cash bonds. In the US, Henry Paulson opened up for a change in the TARP. In Latvia, the second largest bank was nationalised, illustrating the current challenges in the Baltic countries.
The beginning of the week was characterised by weakness in the credit market as CDS spreads drifted wider on the back of more bad economic news and the announcement by Paulson concerning a possible change in the scope of the US support package (more on this below). Without material news, sentiment became more positive towards the end of the week, and currently the investment grade index, iTraxx Europe, trades at 148bp, up from 140bp last Friday. The high yield index, iTraxx Crossover, trades at 814bp, up from 760bp last week. Interestingly, high yield continued to underperform investment grade in a week when several investment grade companies approached the primary market, cf. below.
As was the case last week, money market tensions are gradually easing. Looking at the forward expectations, the market is expecting a further decline in LIBOR – OIS rates. This suggests that liquidity is beginning to flow more freely; we believe that the (short end of the) cash credit market will benefit from this.
