Bond Risk Increases as Doubts Mount Over European Rescue Plan
The cost of insuring against default on corporate and sovereign debt rose in Europe as confidence in the region’s rescue plan waned.
The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly junk credit ratings jumped 32.5 basis points to 650, according to JPMorgan Chase & Co. at 2:30 p.m. in London. The index dropped 110.5 basis points last week with a decline signaling improved perceptions of credit quality.
The region’s largest banks may raise just a tenth of the total capital shortfall estimated by regulators, according to Morgan Stanley. Efforts to boost the bailout fund to 1 trillion euros ($1.4 trillion) with the help of China and cooperation of the International Monetary Fund may also prove difficult.
“It’s the traditional reaction where it’s all very exciting at first and then everyone calms down, sobers up and realizes that actually nothing has changed,” Gary Jenkins, head of fixed income at Evolution Securities Ltd. in London, said in an interview on Bloomberg TV’s “The Pulse” with Maryam Nemazee. “At the moment really we don’t know much more than we did before the grand plan.”
The Markit iTraxx SovX Western Europe Index of swaps on 15 governments increased 15 basis points to 305 basis points.
Contracts on Italy increased 38 basis points to 443, according to CMA. Spain widened 26 basis points to 342, Ireland rose 28 basis points to 707, and France was 18 higher at 176 basis points.
The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was up 9.25 at 159 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers added 13.5 basis points to 221 and the subordinated gauge was 26.5 higher at 418.5.
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.
To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net
Bloomberg moderates all comments. Comments that are abusive or off-topic will not be posted to the site. Excessively long comments may be moderated as well. Bloomberg cannot facilitate requests to remove comments or explain individual moderation decisions.