Bloomberg News

Credit Rallies Most in 14 Months in Europe on U.S. Budget Deal

January 02, 2013

Credit markets in Europe rallied by the most in 14 months and issuers prepared the year’s first bond sales after U.S. lawmakers passed a budget bill that averts a threat to the recovery in the world’s biggest economy.

The Markit iTraxx Crossover Index of credit-default swaps on 50 mostly junk-rated companies dropped 47 basis points to 436 basis points at 4:45 p.m. in London, the biggest decline since Oct. 27, 2011, according to data compiled by Bloomberg. Spain’s Banco Bilbao Vizcaya Argentaria SA (BBVA) and Paris-based utility Veolia Environnement SA (VIE) hired banks for debt offerings.

The U.S. budget breakthrough clears a yearlong impasse over how to avoid tax increases and spending cuts due to start this month that could lead to a recession. The bill will delay by two months automatic budget cuts as Republican lawmakers scrapped efforts to add further reductions to the deal.

“The deal averts the immediate threat of a massive fiscal tightening,” Emily Nicol, a London-based analyst at Daiwa Capital Markets Europe, wrote in a note to clients. “But it only postpones until the start of March the automatic spending cuts that formed a large part of the fiscal cliff.”

U.S. lawmakers face their next battle as soon as next month over increasing the country’s debt ceiling, which was reached on Dec. 31. Congress must act to prevent a default and avoid a similar dispute in 2011 that led to a downgrade of the U.S. credit rating.

“Markets will remain on tenterhooks for the rest of this year as fractious U.S. political point-scoring takes center stage,” Bill Blain, a strategist at Mint Partners in London, wrote in a note to clients.

Yields Plunge

The drop in debt insurance costs adds to last year’s rally when the Markit iTraxx Crossover index fell 36 percent in the biggest decline since 2009. Bond yields plunged to a record 1.91 percent in 2012 from 4.4 percent at the start of the year, while the yield premium to the benchmark swap rate narrowed to 131 basis points from 252, Bank of America Merrill Lynch’s Euro Corporate Index shows.

BBVA, Spain’s second-biggest bank, plans to sell five-year senior unsecured bonds in euros, according to a person familiar with the matter, who asked not to be named because they aren’t authorized to speak about the offering.

Veolia Environnement hired banks for a series of investor meetings to sell subordinated, undated securities in euros and pounds, a person with knowledge of the roadshow said.

The Markit iTraxx Europe Index of credit-default swaps on 125 investment-grade companies fell 11 basis points to 106. The Markit iTraxx Financial Index of contracts on the senior debt of banks and insurers fell 16 basis points to 126 and the subordinated index fell 26 to 209 basis points.

A basis point on a credit-default swap contract protecting 10 million euros ($13.3 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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To contact the reporter on this story: Hannah Benjamin in London at hbenjamin1@bloomberg.net

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


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