European credit protection widens in low liquidity

Liquidity in the European credit derivatives market remained weak following the US Labor Day holiday this week, with traders saying spreads "drifted outwards" following yesterday’s poor equity markets performance.

“Over the past few weeks we have seen a general level of tightening in the credit markets with the launch of several CDOs,” said one trader in London today. “This trend is now being reversed with a widening of spreads for protection in most sectors”.

A proportion of these CDOs may not yet be hedged, but poor equity markets coupled with the release of low European car sales figures indicating continued economic weakness mean negative sentiment is prevailing in thin markets, he added.

The cost of