European Bond Risk Rises as Central Bank Lowers Interest Rates
The cost of insuring against default on sovereign and corporate debt rose after the European Central Bank cut interest rates to a record low, while refraining from announcing additional steps to boost the economy .
The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments rose 10 basis points to 279.5 at 3:40 p.m. in London. An increase signals deterioration in perceptions of credit quality; a decline, the opposite.
The ECB lowered the main refinancing rate to 0.75 percent from 1 percent and cut its deposit rate to zero as the sovereign debt crisis threatens to drive the euro region into recession. Speaking in Frankfurt after the decision, ECB President Mario Draghi said the council didn’t discuss other non-standard tools.
Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings rose 22 basis points to 665. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings increased six basis points to 165.
The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers climbed 13 basis points to 268 basis points and the subordinated index increased 16 to 437.
A basis point on a credit-default swap protecting 10 million euros ($12.4 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.
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