Credit rally gathers momentum
Credit kicked off the week in a committed fashion, with spreads continuing to tighten and the rally gaining strength throughout the day.
The Markit iTraxx Europe was more than 4bps tighter at 101bps, and when roll effects are taken into account, European credit is at its strongest point for nearly two years. Month-end rebalancing and market illiquidity may have contributed to today's rally, but there is little doubt where the medium-term trend lies.
Positive news from Italy also provided tightening impetus. A "grand coalition government", led by new Prime Minister Enrico Letta, was agreed over the weekend by parties from across the political spectrum. After two months of deadlock this is clearly a welcome development, though it is questionable how long the government will survive or what reforms it can achieve given the differing viewpoints within it.
Nonetheless, the formation of a government helped the sovereign complete a successful auction this morning. The Italian treasury sold €6 billion of five- and 10-year debt at yields considerably lower than auctions conducted just a few weeks ago.
Italy's borrowing costs are now at their lowest since late 2010, and CDS spreads (256bps, -8) also tightened, though they are lagging behind bonds somewhat. The reaction in Italian bank CDS was stronger, with Unicredit (300bps, -16) and Intesa Sanpaolo (275bps, -21) both among the top performers in Europe today.
Once month-end is out of the way, attention will turn to the economy in what should be an eventful week. The ECB is widely expected to ease policy on Thursday, and it will be interesting to see if the central bank goes further than a cut in the refinancing rate.
Markit PMIs and the US non-farm payrolls report could also shift spread direction in a week where liquidity could be constrained.