Fed fears push credit wider

Credit started the week on the back foot amid reports the Federal Reserve is preparing plans to scale back its quantitative easing programme.

The Fed is currently spending $85bn a month as part of its policy to reduce unemployment to reasonable levels. It is debatable how successful its efforts have been, but there is little doubt that the US labour market has been improving in recent months.

It is also the case that the central bank's unconventional measures have boosted risk assets, leading many to ask if credit is in a bubble.

It would be a major surprise if a reversal in QE was imminent - the unemployment rate is still too high. However, it served as a reminder that central bank largesse is far from permanent and fixed income securities are vulnerable to monetary policy tightening.

The Markit iTraxx Europe was trading more than 3bps wider at 96bps, and has given back 6.5bps since last Tuesday. However, it is still more than 30bps tighter than where it was trading in late March, and central banks around the world remain supportive.

High-beta names and banks were among Monday's underperformers, with Standard Chartered a notable laggard. The bank's CDS widened 13bps to 104bps following news that short-seller Muddy Waters has bought protection on the name.

Standard's high exposure to China is often regarded as one of its strengths, and helps explain why it trades relatively tight. But Muddy Waters highlighted deteriorating asset quality in China as the main rationale for its position. HSBC also has considerable Asian exposure, but its spreads widened just 3bps to 83bps.

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