Bloomberg News

Sovereign Bond Risk Falls in Europe as Spain, France Sell Debt

December 01, 2011

Dec. 1 (Bloomberg) -- The cost of insuring against default on European sovereign debt fell for a third day after Spain and France sold 8.1 billion euros ($10.9 billion) of bonds.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments dropped seven basis points to 361 at 1:30 p.m. in London. Contracts on Spain decreased 26 basis points to 381 and France declined 10 to 190, according to CMA.

The debt sales added to a rally fueled by a coordinated effort yesterday by the Federal Reserve, the European Central Bank and four other central banks to cut the cost of emergency dollar funding. Spain sold 3.75 billion euros ($5.1 billion) of bonds, the maximum amount planned, and French borrowing costs declined in its auction of 10-year notes.

“The auctions helped,” said Harpreet Parhar, a strategist at Credit Agricole SA in London. “After yesterday’s announcement, risk appetite was back on and the auctions were never going to struggle.”

Swaps on Belgium tumbled 13 basis points to 292, Germany was 2.5 lower at 95.5 and Ireland fell 27 to 691, while Italy was 21 lower at 459 and Portugal was down 34 at 1,032. An increase signals deterioration in perceptions of credit quality; a decline, the opposite.

Corporate Debt

The cost of insuring debt sold by financial companies fell on speculation the European Union will ease bank funding costs. The EU may exempt bank debt issued before 2013 from proposals forcing investors to take losses at failing lenders, said a person familiar with the plan.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers declined 12.5 basis points to 285.5 and the subordinated gauge was 20 lower at 507. The benchmarks are down for a fourth day after falling yesterday by the most in five weeks.

The cost of insuring corporate debt fell for a sixth day. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings dropped 14 basis points to 741.5, according to JPMorgan Chase & Co. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 6.25 basis points to 178.25.

A basis point on a credit-default swap protecting 10 million euros ($13.5 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, Andrew Reierson

To contact the reporter on this story: Abigail Moses in London at amoses5@bloomberg.net

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


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