By Abigail Moses - Aug 6, 2010 9:55 PM GMT+0800
Indexes measuring the cost of insuring against losses on European corporate bonds headed for a third week of declines as optimism the region’s economic recovery is accelerating fueled demand for risky assets.
The Markit iTraxx Crossover Index of credit-default swaps linked to 50 companies with mostly high-yield credit ratings decreased 3 basis points to 468, according to JPMorgan Chase & Co. at 2:30 p.m. in London. The gauge, which declines as investor confidence improves, is 11 basis points lower on the week and down from 536 on July 16.
Europe is recovering faster than forecast and money markets are improving, European Central Bank President Jean- Claude Trichet said yesterday as he held the euro region’s benchmark interest rate at a record-low 1 percent. Confidence was underpinned by bank earnings, with Royal Bank of Scotland Group Plc returning into profit for the first time since 2007.
“As long as central bank money remains cheap, this is supportive for risky assets, in particular credits,” Tim Brunne, a Munich-based strategist at UniCredit SpA, wrote in a note to investors. Though “the European banking crisis is essentially over, some of the banks in the euro zone still depend very much on central bank liquidity,” he wrote.
Demand for higher-yielding assets is increasing as Moody’s Investors Service forecasts Europe’s default rate will decline to 2.4 percent by the end of the year. The rate, which increased to 6.2 percent in July from 5.7 percent in June, is down from 7.8 percent last year, Moody’s said in a report yesterday.
Bank Bonds
RBS, Britain’s biggest government-owned lender, joined rivals including HSBC Holdings Plc, Lloyds Banking Group Plc and Germany’s biggest lender Deutsche Bank AG reporting falling bad- loan provisions for the first half or second quarter of 2010.
The Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers rose 1 basis point to 116.5, little changed in the week and near a 3 1/2-month low, JPMorgan prices show.
“We have entered a microclimate that is very supportive for credit,” Barclays Capital analysts led by Matthew Leeming wrote in a note to investors. “Systemic bank funding concerns have receded and real-money investors are covering shorts, especially in senior financials.”
BP Well Plug
BP Plc led a decline in the cost of insuring investment- grade companies as the oil producer completed a cement plug at its Gulf of Mexico well, sealing the source of millions of gallons of oil dumped into the sea after an April rig explosion.
Swaps on BP fell 10 basis points to 220, the lowest level since June 4, according to data provider CMA. The company’s swaps curve normalized this week, with five-year contracts rising above shorter-dated protection for the first time in two months.
The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was little changed at 102.25 basis points, and was 2.75 lower than a week ago, JPMorgan prices show. The index dropped below its North American equivalent this week for the first time since May as investors turned their attention to how sustainable the economic recovery is in the U.S.
The gauge of high-yield European company debt risk pared its decline after a U.S. government report signaled the labor market recovery will be slow to take hold.
Private payrolls excluding government agencies rose by 71,000 in July, after a June gain of 31,000 that was smaller than previously reported, the Labor Department said in Washington. Economists projected a 90,000 July increase, according to the median estimate in a Bloomberg News survey.
The Markit CDX North America Index rose 1.72 basis points to 145.3, Markit Group Ltd. prices show.
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. A basis point on a contract protecting 10 million euros ($13.2 million) of debt from default for five years is equivalent to 1,000 euros a year.
To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net
From Bloomberg published on Aug 6, 2010 9:55 PM GMT+0800