Bloomberg News

Corporate Bond Risk Rises in Europe as German Confidence Drops

October 24, 2012

Corporate bond risk rose in Europe for a fifth day as German business confidence unexpectedly fell to the lowest in more than 2 1/2 years.

The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings rose four basis points to 526 at 11:57 a.m. in London, extending the longest streak of increases since May. PSA Peugeot Citroen’s ailing finance unit led bond climbers in Europe after winning 7 billion euros ($9 billion) of French government guarantees.

The sovereign debt crisis is damping growth in Europe’s largest economy, pushing the Ifo institute’s September business climate index down to 100.0 from 101.4 in the sixth straight decline. Comunidad de Madrid, the regional government for the Spanish capital, said yesterday it postponed a bond sale until market conditions improve.

“One of the only bright spots in European growth has been Germany,” said Harpreet Parhar, a strategist at Credit Agricole SA in London. “It’s seen as the engine of growth, so if Germany’s weak, the eurozone as a whole is going to disappoint.”

Banque PSA Finance’s 6 percent notes due 2015 rose 0.45 cent to 103.15 cents on the euro, the biggest increase in Bank of America Merrill Lynch’s EMU Corporates Non-Financial Index. The yield, which moves inversely to the price, fell 32 basis points to 4.17 percent.

Credit-default swaps on Peugeot rose for a fifth day, climbing one basis point to 780, the highest since Oct. 15 and the longest streak since Feb. 13. An increase signals deterioration in perceptions of credit quality.

Swaps Steady

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was unchanged at 128 basis points.

The cost of insuring against default on European financial debt was little changed, with the Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers up one basis point at 172 and the subordinated index down one at 303.

A basis point on a credit-default swap protecting 10 million euros 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.

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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