Pension deficit concern sparks demand for default protection

Traders saw a marked increase in volumes for credit protection, following a credit watch alert by rating agency Standard & Poor’s (S&P) on 12 major European corporations earlier today. S&P today warned that the companies, including Sainsbury’s, Rolls-Royce and Thyssen Kruppp, may have their credit ratings cut due to concerns over deficits in their pension funds.

The largest mover was Rolls-Royce, traders said. The cost of the British company’s five-year credit protection widened nearly 20bp today to 250/270bp. Other names saw increased activity but limited spread movement. “In recent weeks credit default swap prices have been trading tight relative to falling equity prices,” said one trader. “If spreads do start to edge out, this could signal a re-coupling between the equity and credit markets.”

A number of 30-year bond issues in the European utilities