Bloomberg News

Banks Lead Decline in Bond Risk in Europe as Crisis Bets Pared

January 03, 2012

Jan. 3 (Bloomberg) -- Banks led a drop in the cost of insuring European corporate debt to a month-low as investors pared bets that the region’s crisis is deepening.

The Markit iTraxx Financial Index of credit-default swaps on the senior debt of 25 banks and insurers fell 12.5 basis points to 264.5 as of 4:30 p.m. in London, the lowest since Dec. 5, 2011, according to JPMorgan Chase & Co. The gauge reached a record-high 358 basis points on Nov. 25.

U.S. manufacturing accelerated at the fastest pace in six months and more than twice the forecast rate, while data this year already showed U.K. and German factory output beat estimates.

“Some of it’s a reaction to a bit better news, some of it’s a retracement of negative sentiment and some of it’s people getting back in the saddle,” said Roger Francis, an analyst at Mizuho Securities Co. Ltd. in London.

Subordinated bond risk also declined, with Markit Group Ltd.’s gauge dropping 24 basis points to 488, the lowest since Dec. 7.

In the new-issue debt market, UBS AG, Switzerland’s biggest bank, and a unit of ING Groep NV started the New Year by selling top-rated covered bonds to cut funding costs while satisfying investor demand for the safest securities.

UBS offered five-year bonds at a yield of 61 basis points more than the benchmark swap rate, less than a third of the 187 basis-point spread on its existing senior unsecured notes due in 2017, according to Bloomberg Bond Trader prices. Banks including Credit Agricole SA, Australia & New Zealand Banking Group Ltd. and Lloyds TSB Bank Plc are also preparing to sell covered bonds.

Rabobank Bond

Rabobank Nederland, the highest-rated private lender, hired banks for the first public benchmark sale of senior, unsecured bank bonds in euros for more than a month.

“Traditionally, we see a bounce in January,” said Harpreet Parhar, a strategist at Credit Agricole SA in London. “If we see new issues placed, that could provide positive momentum for the market.”

The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings dropped 18.5 basis points to 736.5, also the lowest since Dec. 7. The Markit iTraxx Europe Index of 125 companies with investment- grade ratings fell 3.75 basis points to 168.75, JPMorgan prices show.

Credit-default swaps on Spain jumped 24 basis points to 404, according to CMA. A report today showed that the country’s unemployment rate rose for a fifth month in December as its economy contracted.

A basis point on a credit-default swap protecting 10 million euros ($13 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: Abigail Moses in London at

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

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