Corporate Bond Risk Falls in Europe as Double-Dip Recession Concerns Ease

The cost of insuring against losses on European corporate bonds fell to the lowest level in two weeks as investors bet the global economy will escape another recession.

The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings decreased 10 basis points to 496, according to JPMorgan Chase & Co. at 2:30 p.m. in London.

The European Central Bank raised its growth forecasts today after the region’s economy expanded at the fastest pace in four years in the second quarter. Borrowers are taking advantage of increased risk appetite, with auto-parts supplier Continental AG marketing the first high-yield issue in a month, after $8 billion of bond sales in Europe yesterday.

“The market has done a turnaround from fearing recession to seeing it as less likely,” said Bill Blain, joint head of fixed income at Matrix Corporate Capital LLP. “Buyers have woken up to the fact they’re underinvested and are concerned they miss any bargains still out there.”

Europe’s expansion was fueled by a record surge in exports and a rebound in corporate spending from a two-year slump.

Exports from the 16-nation euro region surged 4.4 percent from the first quarter, the biggest gain since data were first compiled in 1995, while corporate spending rose 1.8 percent, ending eight quarters of contraction, the European Union’s statistics office in Luxembourg said today. Gross-domestic- product growth accelerated to 1 percent, in line with an Aug. 13 estimate, from a revised 0.3 percent in the previous quarter.

Emergency Measures

The ECB today raised its forecasts for 2010 economic growth to about 1.6 percent from 1 percent previously and to 1.4 percent in 2011 from a previous projection of about 1.2 percent. ECB President Jean-Claude Trichet extend emergency lending measures for banks into 2011 and left the benchmark interest rate at a record low of 1 percent.

Swaps on Continental, which plans to sell at least 750 million euros ($962 million) of seven-year bonds, fell 3 basis points to 470.5, according to data provider CMA. Europe’s second-largest auto-parts supplier is rated B, or five levels below investment-grade, by Standard & Poor’s, and one step higher by Moody’s Investors Service.

iTraxx Europe

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 2.25 basis points to 109.75, JPMorgan prices show. The Markit iTraxx Financial Index of 25 banks and insurers dropped 4 basis points to 134.

The cost of insuring against default on sovereign debt also fell, with the Markit iTraxx SovX Western Europe Index of swaps on 15 governments dropping 4 basis points to 143, according to CMA.

Swaps on Portugal dropped 23 basis points to 304, Greece tumbled 23 to 874, Spain declined 6.5 to 212.5, Italy was 6 lower at 200 and Ireland was down 3 at 332.

A basis point on a credit-default swap contract protecting 10 million euros 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 company fail to adhere to its debt agreements. A decline signals improvement in perceptions of credit quality.

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

• Tweet
• More
  • Business Exchange
  • Buzz up!
  • Digg
• Print
• Email