Choppy trading in credit

Trading in the credit markets was expected to be choppy this week, and so it has proved, with the main indices widening significantly today.

The Markit iTraxx Europe tightened on Tuesday, but has since snapped back, widening by 6bps to 100.25bps on Wednesday. This is the first time the index has exceeded 100bps since May 1.

School holidays in Europe and a consequent drop in liquidity may be contributing to the volatility, but it is more likely that the ongoing uncertainty surrounding global monetary policy is driving the oscillations.

News that three EU countries had been given extra time to meet budget deficit targets had little impact on markets. The European Commission said it had granted France and Spain another two years to get their deficits below 3%, recognising that they had no chance of hitting the original 2013 target.

Netherlands was given another year, and it would be no surprise to see further flexibility on austerity after German elections in September.

Peripheral banks led the move wider, closely followed by commodity names. The latter sector was affected by news that China's growth forecast for this year was downgraded by the IMF to 7.75% from 8%. Glencore's CDS widened 22bps to 215bps.

In the US, Bausch & Lomb was steady after tightening sharply yesterday. The US eyecare company was acquired on Tuesday by pharmaceuticals group Valeant.

The latter is highly leveraged and junk-rated, so the takeover might be expected to cause Bausch's spreads to widen. But the opposite happened, and it is probable that this was triggered by concerns over the CDS being 'orphaned'; in other words left with no deliverable obligations. Valeant is paying off all of Bausch's debt, which could affect the CDS succession process.

Overall, more volatility is likely ahead of the crucial US non-farm payrolls report next week

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