The cost of insuring sovereign and corporate debt fell on speculation the European Central Bank’s plan to buy government bonds will help lower borrowing costs and stem the euro area’s crisis.
The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings dropped 15 basis points to 579 at 11:30 a.m. in London, the lowest since March 21. A decline signals improvement in perceptions of credit quality.
Credit markets extended a rally triggered last week when ECB President Mario Draghi signaled the central bank may buy debt, though the details are still being worked out. The plan won support from German Chancellor Angela Merkel’s government and Spain said it hasn’t ruled out requesting aid.
“The market is clearly encouraged by ECB’s guidance as bearish bets continue to be pared back,” Jim Reid, head of fundamental strategy at Deutsche Bank AG in London, wrote in a note to investors. “If we can get to a stage where the ECB aggressively buys bonds then it will give Europe more time to try to find a growth miracle.”
Credit-default swaps on Italy fell 14 basis points to 459.5 and Spain dropped 12 to 523, both the lowest in a month. The Markit iTraxx SovX Western Europe Index of 15 governments fell 1.5 basis points to 248, the lowest since the series started trading in March.
The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell four basis points to 146 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers fell eight basis points to 238 and the subordinated index declined 12 to 393.
A basis point on a credit-default swap protecting 10 million euros ($12.4 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.
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