Volatility becomes the new normal

Volatility seems to be the new normal in the credit markets as spreads oscillated in a broad range yet again on Thursday, mainly thanks to events in Japan.

European markets retreated at the open in reaction to the sharp fall in Japanese stocks. The Nikkei index fell over 5%, a big move, but one that is not out of the ordinary in recent days. Credit was fairly resilient, the Markit iTraxx Europe widening modestly and staying over 100bps.

As the day progressed, the market rallied, again driven by news from Japan. A report suggested that the Japanese public pension fund, otherwise known as the Government Pension Investment Fund (GPIF), is considering a change to its strategy that will allow it to buy more equities instead of government bonds.

GPIF is the world's largest pension fund, so the news could not be taken lightly, though it had ambiguous ramifications for non-Japanese markets.

However, by the close the Markit iTraxx Europe was back above 100bps, a reflection of how the markets are struggling for direction. Nothing stood out in the single name universe, though there was some interesting news on Fiat. The Italian auto company is reported to be in talks to borrow $10 billion from banks to buy the stake in Chrysler that it doesn't already own and refinance the group's debt.

News of a possible full merger of Chrysler and Fiat was well-received by the equity markets, but had little impact on credit. Fiat's CDS spreads were steady at 452bps, meaning that it trades with an implied rating of 'B', according to Markit data.

Fiat has made good progress recently and this is reflected in the company's spreads over the past 12 months, but it is still the widest European car maker, with the exception of Peugeot.

It is month-end tomorrow, so we can expect to see positioning trades, and it would be no surprise to see further volatility going into the weekend.

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