Europe Corporate Bonds Sink Amid Widespread Market Sell-Off

(Bloomberg) -- Europe’s corporate debt risk gauges soared on Friday afternoon as credit markets reacted to the slump in global stocks and the spike in bond prices.

The Markit iTraxx Europe Crossover index of credit-default swaps on high-yield companies rose 80.3 basis points to 384, its highest level since June 2016. The cost of insuring senior financial debt also rocketed, up 16 points in its biggest move in almost two years. Elsewhere, secondary prices for European leveraged loans fell to their lowest level since July 2016.

“It’s very much a panic mode,” Vaclav Vacikar, a credit strategist at Rabobank, said. “The cost of insurance spiked today. It looks like market participants don’t want to hold the risk over the weekend. Overall, I think the intra-day volatility has been unprecedented.”

The moves follow a sharp drop in government bond yields with the U.S. 30-Year Treasury bond posting its biggest drop since 2009. Ten-Year Treasury notes have fallen 80 basis points in the past three weeks and traded at 0.73% mid-afternoon London time. In Europe, German 30-Year bund yields fell to an all-time low.

Companies with fragile balance sheets were among the hardest hit. French steel tube maker Vallourec’s notes due September 2024 plunged 6 points to 72.4, while entertainment company Merlin’s bonds due November 2027 fell 5.3 points to 89.8, the lowest since they were issued in October.

“We’re seeing a correction and I believe we have not seen the worst yet,” Jeroen van den Broek, a credit strategist at ING Bank NV, said.

To contact the reporters on this story: Bruce Douglas in London at bdouglas24@bloomberg.net;Marianna Aragao in London at mduartedeara@bloomberg.net;Alice Gledhill in London at agledhill@bloomberg.net

To contact the editor responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net

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