Reacting to U.S. consumer price index data Wednesday, players in Europe snapped up protection on indices. The data showed higher-than-expected inflation and raised concerns about extended interest rate increases. This in turn fueled a widening in spreads on the index suite, a trend which was kick started last week on the back of a downturn in equity markets (see story, page 4).
The price of five-year protection on iTraxx Europe jumped out to 32 basis points Thursday, from around 28 bps on Monday. Over the same period, Crossover blew out more than 20 bps to 263 bps and HiVol widened to 57 bps from 50 bps. One trader noted the main index rallied about 5bps when trading opened Wednesday, but this proved short lived after the U.S. CPI release.
Traders across the Street noted the market is uncertain whether the widening trend will continue. "We were very tight, so a correction needed to happen," said one London-based trader. "But people think fundamentals haven't changed and don't know exactly why we are widening." Another trader noted, "There is a lot of confusion between dealers and clients."
Olivier Renault, strategist at Citigroup in London, said the credit markets have resisted following the sharp sell-off in equities and commodities. "Index spreads are still tighter than on the day of the roll," he said, noting the iTraxx Europe was at 37 bps March 20. "I'm surprised credit hasn't sold off more."
