Bloomberg News

High-Yield Bond Risk Set for Biggest Weekly Drop in 16 Months

October 14, 2011

Oct. 14 (Bloomberg) -- The cost of insuring against default on high-yield corporate bonds fell for a third week in Europe, heading for the biggest weekly drop since June 2010, as officials work on plans to solve the region’s debt crisis.

The Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings dropped 10 basis points to 754, according to JPMorgan Chase & Co. at 11:30 a.m. in London. The gauge is down from 813 basis points Oct. 7. A decline signals improvement in perceptions of credit quality.

The International Monetary Fund’s lending resources may be increased with help from nations including China and Brazil, as finance ministers and central bankers from the Group of 20 begin talks in Paris. The rescue plan may also include deeper investor losses on Greek bonds and higher bank capital levels.

“The market has been in rally mode,” said Juan Esteban Valencia, a strategist at Societe Generale SA in Paris. “A lot is riding on the hope that there is a plan for the banks to be recapitalized that it will be workable and credible.”

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 1.25 basis points to 176.75 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers was little changed at 245.5 basis points and the subordinated index fell three to 480.

The cost of insuring sovereign debt rose as Greek bondholders prepare to lose as much as 60 percent of their investment. Swaps on Spain rose four basis points to 387 after Standard & Poor’s cut its credit ranking by one level to AA-.

French Swaps

Contracts on France increased five basis points to 182, Germany rose 2.5 to 95.5 and Ireland climbed 6.5 to 749, while Italy was up five at 458, Portugal was 34 higher at 1,161 and Spain rose seven to 390, according to CMA.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments rose 2.5 basis points to 336.5. The gauge is up from 331 basis points Oct. 7 and headed for the first weekly increase in three weeks.

A basis point on a credit-default swap protecting 10 million euros ($13.8 million) 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.

--Editors: Michael Shanahan, Paul Armstrong

To contact the reporter on this story: Abigail Moses in London at

To contact the editor responsible for this story: Paul Armstrong at

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