Credit market snapshot: spreads rally on European debt talks

Credit spreads rallied yesterday and outperformed equities, despite a flip around in European sovereign trading after ECB executive board member Juergen Stark said the central bank was not prepared to change its collateral rules on government debt. Peripheral sovereign credit default swaps gave back much of their earlier rally at that point, but CDX IG opened 2bp tighter at 94.5bp, according to trader quotes. However, technical trading around the index options expiry then took hold, say sources, with gamma hedging causing it to be better-bid at anything below 95bp but also better-offered above the same strike.

Once the options expiry was concluded, IG resumed its positive tone and closed back at 94.5bp, with some dealer desks reporting as much as $6 or $7 billion in volume. HY also continued to rise towards 101. There was some scepticism by the end of the day that the rally might be overdone, with suggestion that any disappointment in Europe over debt negotiations today would bring a return wider in credit spreads.

In the event, European credit spreads have oscillated slightly today but generally moved tighter following early reports of a new agreement between Germany and France on trying to solve the euro debt crisis. iTraxx Europe is in 1bp to 116.75bp, according to Markit, with Crossover in 4bp to 434bp and SovX in 6bp to 275bp.