With stock exchanges in London and other European capitals suffering their biggest one-day falls since last May yesterday (Thursday), credit product is unlikely to be in favour with European investors until the market stabilises.
Late on Thursday bankers were suggesting that deals being prepared for launch might have to be postponed until a semblance of stability returns. ThyssenKrupp, for example, is due to price a Eu750m seven year bond at mid-swaps plus 145bp today (Friday), but may well have to hold off for a couple of days while investors reassess the situation.
The 10 year Treasury broke all resistance levels to plunge below a 3.7% yield this week, as the market's expectation of rising rates was left in tatters by a much worse than expected February employment growth number, released in the US last Friday.
Market participants had been ready for 100,000 new jobs to be announced, and had braced themselves for a hardening slant to US monetary policy ? instead, there were a paltry 21,000 new jobs.
Exacerbating the pain was a further series of bad economic news, a plunging equity market and renewed fears that the US and its supporters were in for another wave of terrorist attacks, after suspected Al-Qaida bombers killed nearly 200 people in Madrid.
"There has been a blow to confidence because of the weaker than expected February jobs number and now because of terrorism. It certainly looks like we are going to have a bull market in Treasury bonds," said Lee Thomas, global strategist at Pimco.
Investors have bought corporate bonds and shortened duration in anticipation of an improving economy and the next US interest rate move being up ? probably around August.
Now the market expects the Federal Reserve not to raise rates until next year, leaving investors with a strong Treasury rally when they had expected the opposite to happen.
"Credit spreads have been very tight and investors have been anticipating a ?best of all possible worlds' outcome with regard to the economy ? and that will not come true," said Thomas. "People will be vulnerable because if we don't have the anticipated recovery, that will hit corporate profits, and spreads are now priced for perfection."
If present corporate spreads indicate the market's expectation of a perfect, smooth economic recovery, last week's events can only weaken corporate bonds.
At the new low Treasury yields, insurance companies and other investors are holding back, at least from secondary market buying, because they cannot hit their yield targets ? even though secondary spreads have widened.
Other real money investors are on the sidelines because they dislike the tight spreads and want to wait for them to widen further before coming back in.
"There is not much of a commitment from anyone," said Krishna Memani, credit strategist at Credit Suisse First Boston. "No one is putting a significant amount of money to work and the market is floundering."
Spreads in the secondary market widened 2bp-5bp across the board yesterday (Thursday) after news of the bomb attack in Spain.
Car companies suffered the most, largely because of the poor economic data releases, and were as much as 15bp wider.
Dave Ballantine, managing director of trading operations at LA-based investment firm Payden & Rygel, believes chasing credit quality rather than yield is now the game to play.
"Your credit selection is more important," he said. "At this point you need to be more judicious in credit selection and you should probably increase credit quality as opposed to reaching for yield."
Memani believes that once the Treasury and equity markets stabilise, the still positive technical conditions will eventually reassert themselves and corporate spreads will grind tighter again.
