Credit Markets Update: Spreads narrow on positive Cisco news

Credit derivatives spreads generally narrowed today following an upturn in worldwide stock markets after stronger-than-expected results from technology bellwether Cisco Systems. The networking company reported a net profit of $729 million for its third quarterr, reversing a $2.7 billion loss for the similar period last year. Its results sparked a 7.8% rise in the Nasdaq.

The results led to expectations of an upturn in the economy, which would in turn lessen the likelihood of defaults. Despite only light trading in Cisco credit default swaps, other names saw a narrowing of spreads, including a number of telcos.

Five-year protection on Deutsche Telekom and France Telecom tightened by 25 basis points to 200bp/220bp and 360bp-mid respectively. But spreads on troubled credits like Ericsson and Alcatel continued to move wider. Ericsson’s cost of five-year protection hit 500bp-mid, 50bp wider than at the start of the week, while Alcatel widened by a similar amount to 475bp-mid.

But Cisco’s effect on the wider economy could prove a false dawn, some traders claimed. “The market has been looking for an excuse to rally. It got that excuse through Cisco,” said one trader.

Regardless of an overall buoyant mood, the cost of protection on US investment bank names like Merrill Lynch continued to widen, due to jitters over investigations into alleged misapplications of analyst ratings.

Merrill Lynch, traditionally one of the most stable credits in the market, has seen its credit derivatives spreads widen by around 50bp since the start of the month. Five-year credit derivatives spreads on Merrill currently stand at 102/108bp compared with 50bp/55bp at the end of March. Goldman Sachs traded at 68bp/78bp today compared with 42bp/48bp at the end of March, with Lehman's figures at 82bp/92bp and 58bp/64bp over the same time-frame.

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