Two new measures of default risk on emerging-market debt start trading today along with the latest series of existing corporate and sovereign benchmarks.
Markit Group Ltd., which administers gauges of credit- default swaps, said it’s offering the Markit iTraxx CEEMEA and Markit CDX LatAm Corporate indexes “in response to increasing client demand for an efficient tool to hedge and gain exposure to corporate debt” in central and eastern Europe, the Middle East and Africa as well was Latin America.
Interest in higher-yielding emerging-market debt is growing as Federal Reserve and European Central Bank bond-purchase programs drive down yields on securities in developed economies. The new indexes may boost liquidity and lower volatility, said Aziz Sunderji, a corporate credit strategist at Barclays Plc’s investment banking unit in New York.
“Emerging-market corporates are one of the fastest growing asset classes in recent years,” Sunderji said. “If these indexes are successful, it would be a huge step forward for the asset class.”
The iTraxx CEEMEA emerging-market corporate gauge includes swaps on 25 companies including Abu Dhabi National Energy Co., the utility known as Taqa (TAQA); steel maker Evraz Group SA; International Petroleum Investment Co., an oil producer in the United Arab Emirates; and U.K.-British oil joint venture TNK-BP, according to Markit’s website. The index traded at 250 basis points at 10:30 a.m. in London.
Gauges of credit-default swaps on companies in Europe, Asia, Japan and Australia rolled into their 18th series today. The 19th version of the Markit CDX North America Investment- Grade Index also opens as well as the eighth version of Markit’s iTraxx SovX Indexes of government debt swaps.
New credit-default swap benchmarks are created every six months when constituents are added or dropped depending on their ratings, cost of protection and ease of trading.
Including lightly traded contracts in an index doesn’t necessarily help increase liquidity in the underlying swaps or in the gauge. Cyprus was removed from the Markit iTraxx SovX Western Europe Index today because of a lack of trading in swaps linked to the nation’s debt.
That measure, now tied to 14 governments, traded at 134 basis points in London, compared with 170 on the previous series at yesterday’s close.
“The index rolls have stopped having the level of significance in the days when myriad synthetic structured products” had exposure to credit-default swap gauges, David Watts, European credit strategist at CreditSights Inc. in London, wrote in a note. “The rolls have lost their massive significance. Even so, they remain an important reference point for European credit, typically moving earlier than cash bond indices,” he wrote.
The Markit iTraxx Crossover Index of credit-default swaps on 50 mostly junk-rated European companies cost 528 basis points, compared with 462 basis points yesterday. London-based Markit, which administers the iTraxx and CDX indexes, said five companies changed in the high-yield measure.
The Markit iTraxx Europe index of 125 companies with investment-grade ratings was at 128 basis points, compared with 121 yesterday, after six companies changed.
The Markit iTraxx Financial Index of swaps on the senior debt of 25 banks and insurers traded at 182 basis points and the subordinated index was at 300 basis points. ING Bank NV and Standard Chartered Bank Plc replaced Banca Monte dei Paschi di Siena SpA (BMPS) and Banco Bilbao Vizcaya Argentaria SA (BBVA) in both financial gauges and the investment-grade measure.
A basis point on a credit-default swap protecting 10 million euros ($12.9 million) of debt 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 reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net