By Abigail Moses - Jul 21, 2010
The cost of insuring against losses on European financial bonds fell to the lowest in one week on speculation that stress tests will reassure investors that banks can withstand a crisis.
The Markit iTraxx Financial Index of credit-default swaps on 25 of the region’s banks and insurers dropped 5 basis points to 135.5, JPMorgan Chase & Co. prices show. The contracts are down from a 15-month high of 200 basis points June 8.
Banks will publish their estimated Tier 1 capital ratios under three different scenarios, according to regulator documents obtained by Bloomberg News. The Committee of European Banking Supervisors is using the tests this week to bolster confidence after a sovereign deficit crisis triggered a sell-off in the financial sector.
“People perceive there’s some progress to be made from stress tests in terms of transparency and capitalization,” said Aziz Sunderji, a London-based credit strategist at Barclays Capital in London. “Most of the price action for European credit is around stress testing.”
Under one of the events tested, lenders will publish how much they will need to raise if Tier 1 capital, used to cushion losses, falls below 6 percent in a “sovereign shock,” the draft shows.
Credit markets were also buoyed by better-than estimated earnings from Apple Inc. to Fiat SpA and Accor SA.
The Markit iTraxx Europe Index of swaps on 125 investment- grade companies declined 3.25 basis points to 116.25 and the Markit iTraxx Crossover Index of swaps on 50 companies with mostly high-yield credit ratings dropped 9.5 basis points to 524, according to JPMorgan.
A basis point on a credit-default swap contract protecting 10 million euros ($12.9 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.
To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net
From Bloomberg published on Jul 21, 2010