Bank Bond Risk Falls to Eight-Week Low in Europe on Stress Test Optimism

The cost of insuring against losses on European financial bonds fell to the lowest level in eight weeks on optimism stress tests may boost confidence in the region’s banks.

The Markit iTraxx Financial Index of credit-default swaps on the senior debt of 25 banks and insurers dropped 9 basis points to 131, the lowest since May 12, according to JPMorgan Chase & Co.

The tests may reveal bank holdings of sovereign debt which have been weighing on investor confidence since the budget deficit crisis triggered a sell-off in southern European government securities. The Committee of European Banking Supervisors is examining 91 lenders to assess how they can withstand a shrinking economy and a drop in government bonds.

“Transparency around bank exposures could contribute to the reduction in volatility,” Aziz Sunderji, a London-based credit strategist at Barclays Capital, wrote in a note to investors. Clarity of banks’ holdings is required for issuers “to feel more comfortable about coming to the market, and for portfolio managers to feel more comfortable putting large cash balances to work,” he wrote.

Swaps on Spanish banks led today’s decline, CMA DataVision prices show. Contracts on Banco Santander SA dropped 11 basis points to 161 and Banco Bilbao Vizcaya Argentaria SA fell 20.5 to 202.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 4.5 basis points to 113.75. The gap between the corporate and financial gauges is now the tightest since April and down from a record 55 basis points on June 4.

A basis point on a credit-default swap contract protecting 10 million euros ($12.6 million) of debt from default for five years is equivalent to 1,000 euros a year.

Credit-default 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. An increase signals deterioration in perceptions of credit quality.

To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net

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