June 30, 2010, 6:45 AM EDT
By Bryan Keogh
June 30 (Bloomberg) -- The cost to protect bank bonds from default fell the most in more than a week after the European Central Bank said lenders asked for 131.9 billion euros ($161.5 billion) for three months, less than economists had forecast.
Credit-default swaps on the Markit iTraxx Financial Index of 25 banks and insurers declined 8 basis points to 164, according to JPMorgan Chase & Co. at 11:30 a.m. in London, the biggest one-day decline since June 18.
Banks tomorrow need to repay 442 billion euros in 12-month ECB funds and demand for the three-month cash was a litmus test for the health of Europe’s banking system, economists said. The Frankfurt-based central bank said 171 institutions asked for money at its benchmark interest rate of 1 percent.
“The initial reaction should be a stop of all risk- aversion related trades,” said Luca Cazzulani, senior fixed- income strategist at UniCredit SpA in Milan.
U.S. index futures rose as equity markets rebounded from the biggest sell-off in 14 months. The euro strengthened and European stocks rallied after the central bank figures suggested reduced funding pressure for lenders.
Credit-default swaps tied to Greek bonds fell 32.5 basis points to 970.5, while contracts on Portugal declined 8.6 basis points to 322, according to CMA DataVision. Swaps on Spain dropped 1 to 271.5 basis points.
“The figure is probably lower than the market was expecting and therefore will be taken as good news,” Gary Jenkins, the head of credit strategy at Evolutions Securities Ltd. in London, wrote in a note to investors.
The Markit iTraxx Crossover Index of swaps on 50 companies with mostly high-yield credit ratings fell 8 basis points to 573.5, according to Markit Group Ltd. The Markit iTraxx Europe index of 125 companies with investment-grade ratings declined 3.75 basis point to 128.75, Markit prices show.
Equities, Bunds Rise
The euro, equities and bund rates will rise, while yields on southern European bonds should decline relative to benchmark rates, Cazzulani forecasts. When the 442 billion euros of debt is repaid there will be very little excess liquidity left in the system, pushing money-market rates higher, he said.
A basis point on a credit-default swap protecting 10 million euros ($12.2 million) of debt from default for five years is equivalent to 1,000 euros a year.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. The index is a benchmark for the cost of protecting bonds against default and an increase signals a deterioration in the perception of credit quality.
--With assistance from Kate Haywood. Editors: Michael Shanahan, Paul Armstrong
To contact the reporter on this story: Bryan Keogh in London at bkeogh4@bloomberg.net
To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net
From Bloomberg Businessweek published on June 30, 2010, 6:45 AM EDT