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Default Risk Falls to Five-Month Low in Europe on Manufacturing

February 01, 2012

(For more on euro-region crisis click on EXT4.)

Feb. 1 (Bloomberg) -- The cost of insuring against default on European corporate debt fell to the lowest since August after a report showed U.S. manufacturing expanded at the fastest pace in seven months.

The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings dropped 28 basis points to 590, the lowest since Aug. 8, according to JPMorgan Chase & Co. prices at 4:30 p.m. in London. A decline signals an improvement in perceptions of credit quality.

Growth in production from America to China is fueling optimism that companies will withstand the euro-area sovereign crisis. The Institute for Supply Management’s U.S. factory index rose to 54.1 last month from 53.1 in December, the Tempe, Arizona-based group’s report showed today.

“The positive trends are there and growing in strength and keep driving the market forwards,” said Roger Francis, an analyst at Mizuho Securities Ltd. in London. “However, people continue to worry because they’ve been burnt so many times already.”

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 5.75 basis points to 137.5 basis points, the lowest since Aug. 5, JPMorgan prices show. Financial-company bond risk also fell, with the Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers declining 8.5 basis points to 210.5 and the subordinated index was 20 basis points lower at 362.

Sovereign Risk

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments fell 14 basis points to 325.

European manufacturing shrank less than forecast, data released today showed, as Germany made up for weakness in countries from France to Ireland. A euro-region factory index rose to 48.8 in January, below the 50 threshold that indicates expansion.

A basis point on a credit-default swap protecting 10 million euros ($13.1 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: Michael Shanahan

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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