June 21, 2010, 5:33 AM EDT
By Abigail Moses
June 21 (Bloomberg) -- The cost of insuring against losses on European corporate bonds fell to the lowest level in almost six weeks as investors bet a loosening of China’s currency peg will bolster sales for Europe’s exporters.
The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings dropped for a ninth day, falling 23.5 basis points to 496.5, according to JPMorgan Chase & Co. prices at 10 a.m. in London. The contracts are down from 628.5 basis points June 8.
Stocks also surged and commodities gained after the People’s Bank of China said June 19 it will end a two-year dollar peg adopted during the global financial crisis to protect its exporters. China’s central bank yesterday reaffirmed it would maintain the yuan’s 0.5 percent daily trading band and said greater flexibility would help cut the trade surplus and reduce the reliance on exports as a driver of growth.
“The immediate impact of a currency revaluation will be that Chinese importers will buy foreign goods and services at lower prices,” said Tim Brunne, a Munich-based credit strategist at UniCredit SpA. “This is beneficial for exporters in Europe and elsewhere.”
The Chinese central bank made its announcement a week before leaders from the Group of 20 nations meet in Toronto to discuss items ranging from the global response to the European sovereign-debt crisis to increasing the influence of developing countries in the International Monetary Fund.
‘Constructive Step’
President Barack Obama, in a statement, called China’s decision a “constructive step.” U.S. lawmakers said the move was insufficient because it didn’t indicate the timing or amount of adjustment.
The Markit iTraxx Europe Index of 125 companies with investment-grade ratings decreased 5 basis points to 112, JPMorgan prices show. The cost of protecting bank bonds from default also fell, with the Markit iTraxx Financial Index of 25 banks and insurers down 3.5 at 142.5 and the subordinated index 5 lower at 217.
A basis point on a credit-default swap contract protecting 10 million euros ($12.5 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 company fail to adhere to its debt agreements. A decline signals improvement in perceptions of credit quality.
--Editors: Andrew Reierson,
To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net
To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net
From Businessweek published on June 21, 2010, 5:33 AM EDT