Sovereign Credit Commentary

In the U.K., the markets are readying themselves for a four-day weekend, courtesy of the Queen’s jubilee. But the mood among market participants isn't exactly celebratory given the turmoil that could lie ahead.

Europe’s leaders fail to deliver on the debt crisis–yet again.

The political turmoil in Greece continued to create volatility in the credit markets.

It was an uneventful week in the sovereign credit markets. The Labour Day holiday on Tuesday meant that much of Europe took the opportunity to enjoy a long weekend.

The French election results were always going to be crucial for spread direction this week. Socialist candidate Francois Hollande has his nose in front after the first round and the polls indicate that he will win the second round comfortably on May 6.

Spain was again the centre of attention this week due to two separate debt auctions. The sovereign’s bond yields surpassed 6% and its credit default swaps widened beyond 500bps--two important psychological levels.

The eurozone debt crisis awoke from its slumber last week and it is set to remain in focus over the coming weeks and months.

It seemed likely that the eurozone crisis was dormant and not dead, and it sprang back into life this week. Greece, the usual catalyst, is on the backburner for now so it fell to one of the other peripherals to trigger the latest bout of risk aversion.

Peripheral spreads have been widening sharply, economic data is missing expectations and strikes are breaking out across the eurozone. The first-quarter drew to a close and it could almost have been business as usual in the credit markets after the docility of recent weeks.

The markets, the media and politicians were all waiting for the Greek credit event auction that was held on Monday. Much had been written about the potential for the auction to produce awry results, but the process went smoothly and the final settlement price of 21.5 was close to the recovery value of the bonds pre-restructuring and in line with expectations.

Risk appetite returned to the credit markets as investors took advantage of a brief hiatus in the Greek saga. The credit default swap credit event on Greece was finally announced late on March 9 and it barely caused a murmur in the markets.

There were no prizes for guessing which issue dominated the credit markets this week: Greece.