Bloomberg News

Credit Markets Heading for Worst Quarter Since 2008 in Europe

September 30, 2011

Sept. 30 (Bloomberg) -- Corporate credit markets are heading for their worst quarter in Europe since the collapse of Lehman Brothers Holdings Inc. in 2008 as the prospect of a Greek default triggering an economic slump weighs on investors.

The Markit iTraxx Crossover Index of credit-default swaps linked to 50 companies with mostly high-yield credit ratings climbed more than 400 basis points since July 1, the biggest rise since the fourth-quarter of 2008 when it surged 456 basis points, according to data compiled by Bloomberg. Relative yields on investment-grade company bonds have increased the most on record, Bank of America Merrill Lynch data show.

“The stats speak for themselves,” said Jim Reid, head of fundamental strategy at Deutsche Bank AG in London. “You’ve got a situation where if the European authorities drop the ball it could be worse than 2008.”

Officials are racing to avert the euro-area’s first sovereign default as European lawmakers approve expanded powers for the region’s 440 billion-euro ($593 billion) rescue fund. Investors are concerned Greece’s debt turmoil may infect other countries and impede the global economic recovery.

Yield spreads on investment-grade bonds have surged 140 basis points since the start of the quarter to 309 yesterday, the EMU Corporate index of 1,763 securities shows.

Markit’s Crossover gauge was today up 33.5 basis points to 831.5 basis points, according to JPMorgan Chase & Co. at 12:30 p.m. in London.

ITraxx Europe

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was up 7.75 at 198.75 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers rose 10 basis points to 271 basis points and the subordinated index was up 19 at 517.

Investor confidence in the region’s economy was dented after Germany said that retail sales fell the most in more than four years and the European Union reported the inflation rate in the euro region jumped to 3 percent this month from 2.5 percent in August, accelerating by the fastest in almost three years.

Faster inflation increases pressure on an economy already hurt by tougher austerity measures and waning investor confidence as governments struggle to contain the fiscal crisis. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments increased 4 basis points to 337. with Italy up 11 basis points to 467, according to CMA.

Swaps on Ireland dropped 41.5 basis points to 674.5, the lowest since June, after Anglo Irish Bank Corp. paid a coupon due today on junior debt, which is a “clear indication” that the government intends to pay back a senior bank bond due in November, according to Colm Ryan, head of fixed income at Goodbody Stockbrokers.

One of the biggest sovereign movers worldwide was China, up 18 basis points to 198, after a gauge of manufacturing contracted for a third month as measures of new orders and export demand declined.

A basis point on a credit-default swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. 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.

Fore Related News and information: News on credit derivatives: {NI CDRV <GO>} Top bond stories: {TOPH <GO>} Credit-Default Swaps Sector Graphs: {GCDS <GO>} World Credit-Default Swaps Pricing: {WCDS <GO>} Biggest Credit-Default Swaps Movers: {CMOV <GO>}

--With assistance from Joe Brennan in Dublin. Editors: Michael Shanahan, Paul Armstrong

To contact the reporter on this story: Ben Martin in London at bmartin38@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net


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