Summary

    • Credit spreads largely unchanged from last week
    • High activity in the primary market but constipation lures
    • Global default rates have peaked

    Headlines from the credit market this week

    The credit market is still in good shape although the performance was not able to keep up with that of the first week of the new year. Spreads have stabilised somewhat although a slight widening of CDS indices towards the end of the week marked a decoupling from the equity market, which remained in buoyant mood.

    Volatility continues its way down and the VIX (equity volatility) index is now lower than its long-term average and at the same level as before the crisis. Currently, iTraxx Europe trades at 70bp whereas the Crossover index trades at 398bp. Interestingly, the sovereign CDS index (Western European countries) trades wider than iTraxx Europe. Going forward, much attention will be directed to Greece where CDS spreads are under renewed pressure following the news that debt levels are higher than previously anticipated. Furthermore, the Q4 reporting season is approaching. The risk to credit markets, as we see it, lies in the companies’ outlook and not so much in the actual Q4 results.

    The primary market has been on fire during the week but constipation is luring as new issues have struggled to perform. We have seen several new deals from both automakers and in the high yield market. January is (almost) always a busy month in the primary market and we expect the high activity to continue although in the very short run issuers may need to increase issuance premiums in order to regain investor appetite. If issuance premiums are increased, secondary spreads are likely to follow and we therefore think that a small spread widening is in the cards.