Credit market snapshot: debt negotiations prompt surge tighter

US credit spreads wobbled briefly after Europe’s rally yesterday but ended the session significantly tighter. After initially driving in 2bp to 97.5bo, CDX IG headed back to 98.5bp on reports of one dealer actively buying protection, but US president Barack Obama’s update on the country’s debt negotiations prompted another rally to 96bp. HY ended up half a point to 100.5, having dipped below 100 on Monday.

Traders suggest further rallying could be seen in the US today as shorts look to cover, but point out that the IG index rally yesterday was not replicated by underlying constituents, many of which remained flat. In particular, bank cash bonds and credit default swaps underperformed. Goldman Sachs underwhelmed with quarterly results, revealing that fixed income, currencies and commodities revenues were down 53% - although net revenues in credit products were essentially unchanged. 

European credit spreads have sharply rallied again today. iTraxx Europe has surged in over 5bp to 118.5bp, according to Markit, while Crossover is in 21bp to 440bp and SovX is 18bp tighter to 279bp. Peripheral corporates and banks are seeing rallies of as much as 30bp and more, with Iberdrola, Gas Natural, Enel, Edison, UniCredit, Banca Monte dei Paschi, Deutsche Bank, BNP Paribas and Repsol among the most notable movers.

Sovereigns have benefitted from a markedly more optimistic tone ahead of tomorrow’s meeting of euro zone leaders, despite the words of caution offered yesterday by Germany’s chancellor Angela Merkel. Spain and Italy CDS are both quoted over 30bp tighter by traders, at 325bp and 278bp respectively. Traders say there has been selling of protection throughout the session so far, with Ireland and Portugal gapping in over 100bp each as any thought of placing new shorts was defused by an announcement that the EFSF might be authorised to buy bonds in the secondary market.