Bloomberg News

Sovereign, Bank Debt Swaps Extend Biggest Rally on Summit Bets

December 07, 2011

Dec. 7 (Bloomberg) -- Credit-default swaps on sovereign and bank bonds fell in Europe, extending the biggest-ever weekly declines, on speculation the region’s leaders will make progress toward resolving the debt crisis at a summit tomorrow.

The Markit iTraxx SovX Western Europe Index of swaps on 15 governments dropped 10 basis points to 315 at 9:30 a.m. in London, and is down from a record 385 Nov. 25. Gauges of financial debt risk are down by more than a quarter in the same period, signaling improved perceptions of credit quality.

Politicians are under pressure to deliver a comprehensive plan to restore investor confidence in the euro region after months of indecision fueled speculation the 17-nation bloc will break up. Most international investors predict at least one nation will eventually dump the euro, according to the quarterly Bloomberg Global Poll.

“We don’t think there is any chance of a quick fix to all of this,” Jim Reid, head of fundamental strategy at Deutsche Bank AG in London, wrote in a note to investors. “Although the market is getting more optimistic.”

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers declined 14 basis points to 253 and is down from a record 358 Nov. 25, according to JPMorgan Chase & Co. The subordinated gauge fell 20 basis points to 457, extending the rally from a record 615 on Nov. 25.

Bigger Rescue

Officials are negotiating a bigger rescue effort to discuss at the summit, including running two separate bailout funds simultaneously, the Financial Times reported yesterday. A German-French push for closer economic ties in Europe won the backing of U.S. Treasury Secretary Timothy F. Geithner, who urged governments to work with central banks to erect a “stronger firewall” to end the debt crisis.

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings dropped 25 basis points to 699.5. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was down 7.75 at 164 basis points.

A basis point on a credit-default swap protecting 10 million euros ($13.4 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 Mshanahan3@bloomberg.net

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


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