Bloomberg News

Sovereign, Company Default Swaps Fall on Debt Crisis Optimism

October 19, 2011

Oct. 19 (Bloomberg) -- Credit-default swaps insuring government and company bonds fell on optimism European policy makers will come up with a plan to help resolve the region’s debt crisis.

The Markit iTraxx Crossover Index of contracts linked to 50 companies with mostly high-yield credit ratings dropped 18 basis points to 733, according to JPMorgan Chase & Co. at 10:30 a.m. in London. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments declined 18 basis points to 316.

Investors are betting this weekend’s meeting of European leaders will advance plans to insulate Italy and Spain from the sovereign crisis and boost bank capital. The Guardian newspaper reported that Germany and France agreed to increase the firepower of the European Financial Stability Facility bailout fund.

“Timing remains a major issue as the changes are unlikely to be implemented quickly,” Annalisa Piazza, a fixed-income strategist at broker Newedge Group in London, wrote in a note. “Meanwhile further market volatility should be expected.”

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was down 4.75 basis points at 174.25. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers declined 8.5 basis points to 240.5 and the subordinated gauge was nine basis points lower at 475.

The cost of insuring debt sold by Germany fell, with credit-default swaps tied to Europe’s largest economy declining five basis points to 89, the lowest since Sept. 16.

Spain Debt Risk

Default swaps on Spain dropped even after the nation’s credit rating was cut for the third time in 13 months by Moody’s Investors Service. The contracts declined 10 basis points to 370, according to data provider CMA.

“Moody’s is maintaining a negative outlook on Spain’s rating to reflect the downside risks from a potential further escalation of the euro-area crisis,” the New York-based firm said in a statement. It cited the “continued vulnerability of Spain to market stress” that is driving up the cost of borrowing, as well as weaker growth prospects.

Swaps on France fell five basis points to 182 and Italy dropped 13 basis points to 439. Declines signal improving investor perceptions of credit quality.

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.

--Editor: Paul Armstrong

To contact the reporter on this story: Michael Shanahan in London at Mshanahan3@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net


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