Risk aversion returns to credit markets

By Anastasija Johnson

NEW YORK (Reuters) - U.S. credit markets are becoming more risk averse again as the anniversary of the start of the global credit crunch nears.

Bond insurers have finally had their credit ratings downgraded and banks may yet have to write down the value of more assets as U.S. economic growth and corporate earnings slow, leaving investors sitting on the sidelines.

Though credit conditions are not as bad as they were during the depths of the credit crisis in March, hopes for improvement are fading as companies face increasingly difficult operating conditions and defaults rise.

"There is lot of caution out there," said Citigroup high-yield analyst John Fenn.

Despite some improvement on Wednesday, U.S. high-grade corporate bond spreads remain close to their widest level since April after closing on Tuesday at 258 basis points over U.S. Treasuries, according to a Merrill Lynch index.

U.S. credit default swap rates are close to a three-month high, while junk bonds have lost all of their gains for the year.

European credit markets have also been under pressure. The benchmark investment-grade iTraxx Europe index widened earlier this week to nearly 100 basis points for the first time since mid-April, though it has since eased to 95.

"Obviously people are revisiting the economy, they're revisiting the health of the financial services industry," said Kingman Penniman, president at high-yield research firm KDP Advisors.