Credit spreads have moved tighter despite heavy new issuance. In our view, this is a reflection that the pressure from forced sellers is diminishing. In the US, talks are ongoing about the creation of a bad bank, which could relieve banks from some of their troubled assets. Dutch bank ING has reported heavy losses on Alt-A mortgages and we suspect that more banks will follow. In Sweden the bank guarantee programme has been amended slightly.
Despite a continuing headwind for the macro economy, credit is currently doing reasonably well (if we disregard bank Tier 1 capital). The investment grade CDS index, iTraxx Europe, is currently trading at 157bp compared with 172bp last week. The high yield index iTraxx Crossover has underperformed and is now trading at 1050bp compared with 1085bp last week. The cash market is also performing well and the short end is very well bid for the moment, which to us suggests that the pressure from forced sellers has become smaller.
This is further backed by the continuing strong signals from the primary market. The number of new issues continues to be high but still subsequent performance in the secondary market is strong. Among the Nordic names, Nordea Bank Danmark (the Danish subsidiary) came to the market under the Danish government guarantee. Additionally, Nokia came to the market with its first bond ever.
