The cost of insuring European corporate bonds is heading for its third weekly increase as yields surge amid concern central banks will curb their efforts to boost economic growth.
The Markit iTraxx Europe Index of credit-default swaps on 125 companies with investment-grade ratings rose eight basis points this week, and was at 111 basis points at 10:51 a.m. in London, the longest stretch of weekly gains since March. Average yields on the debt rose nine basis points to a two-month high of 1.99 percent, according to Bank of America Merrill Lynch’s Euro Corporate index.
Credit markets are paring a four-month rally after Federal Reserve Chairman Ben S. Bernanke said last month the central bank could start trimming $85 billion of monthly asset purchases if the employment outlook shows “sustainable improvement.” A report today is projected to show U.S. payrolls grew by 163,000 in May, according to a survey of economists, boosting the prospect the Fed will curb its quantitative easing program.
“If payroll numbers are very strong today, that will be associated with increased expectations of tapering of QE,” said Nick Burns, a credit strategist at Deutsche Bank AG in London. “There are those who think we could see QE tapering as soon as this summer while others think we might not see any this year at all. That’s created the uncertainty that we’re seeing reflected in risk assets.”
Average yields on junk-rated notes climbed 23 basis points this week to 5.46 percent, the highest in a month, Bank of America Merrill Lynch index data show. The spread over government debt widened 27 basis points to 511, the most since April 18.
Spanish toll-road operator Abertis Infraestructuras SA (ABE) and Unibail-Rodamco SE, Europe’s largest publicly traded property owner, were among companies selling 11.4 billion euros ($15.1 billion) of bonds this week, 28 percent below the weekly average for the year, according to data compiled by Bloomberg. Sales of high-yield bonds slowed to 919 million euros from 1.2 billion euros the previous week, the data show.
Bakkavor Group Ltd., a junk-rated U.K. food producer, offered to pay investors more than originally planned when selling 150 million pounds ($233 million) of seven-year notes yesterday, according to a person familiar with the transaction. The bonds were priced to yield 9 percent after being marketed at 8 to 8.25 percent, the person said.
“This is the first time in a long time that the pricing on a high-yield deal has had to be widened to court investors,” said Suki Mann, a strategist at Societe Generale SA in London. “We’ve been in a bull market for the asset class for a while. The widening of price guidance on Bakkavor’s deal is simply because of the current weakness everywhere on tapering fears.”
The Markit iTraxx Crossover Index of default swaps on 50 companies with high-yield credit ratings reached a two-month high of 471 basis points yesterday, after jumping 49 basis points this week. An increase signals deterioration in perceptions of credit quality.
The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers rose 16 basis points to 163 while the subordinated index climbed 22 basis points to 233.
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.
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