Equities rally brings in cost of US and European debt protection

A strong rebound in world equity markets during the early part of this week has caused the cost of credit protection on US and European institutions to markedly narrow. The contraction in credit spreads this week nearly matched the widening seen last week, although trading flows were low, dealers said.

The bearish sentiment reached a crescendo last week as five-year Ford debt protection saw bids of nearly 700 basis points over Libor. “We have seen a lot of the much wider credits come in a lot since Friday,” said a head of credit derivatives trading in London today.

Five-year credit protection for Ford has now tightened back to 500bp. Positive sentiment in the auto sector was further boosted by better-than-expected profits from General Motors. Five-year credit protection for General Motors came