Bank Bond Risk Falls as Spanish Bailout Prospect Fuels ECB Rally

Bank credit risk fell for a third day as the prospect for a bailout of Spain boosts the outlook for the region’s lenders, sending bond yields to a record low.

The Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers dropped seven basis points to 189, according to Bloomberg data at 4 p.m. in London. The average yield on bonds in Bank of America Merrill Lynch’s EMU Financial Corporates index fell to a record 2.75 percent from 5.4 percent at the start of the year.

Investors are betting it’s just a matter of time before Spain asks for a bailout, according to Mizuho International Plc, after Prime Minister Mariano Rajoy said yesterday a request isn’t imminent. Pacific Investment Management Co. and BlackRock Inc. (BLK) are among U.S. investors buying financial bonds in Europe’s most indebted nations as the central bank’s commitment to bring down borrowing costs wins back confidence of the world’s biggest money managers.

“A lot of systemic risk is coming out of the financial system in Europe,” said Roger Francis, an analyst at Mizuho in London. “They’re haggling about timing of a Spanish program rather than talking about the downside for it.”

Spain has no plans to ask for a bailout soon,Rajoy said in Madrid yesterday. A request would further fuel the rally triggered by the European Central Bank’s plan to buy bonds of countries that ask for a rescue, according to Harpreet Parhar, a strategist at Credit Agricole SA (ACA) in London.

Spanish Swaps

Swaps on Spanish government debt rose for the first time in five days, increasing four basis points to 382.5. The contracts have traded in a 50-basis point range since ECB President Mario Draghi’s plan was announced, after dropping from a record 640 on July 24.

“A Spanish bank bailout request would be positively interpreted by markets, and in our view would re-ignite the Draghi-induced rally,” Parhar said. The market’s acceptance that it’s a question of timing “means we should see less volatility around the ‘will they, won’t they’ headlines.”

Markit Group Ltd.’s financial benchmark fell by the most in more than two weeks to near the lowest since July 2011 and is converging with a broader gauge of investment-grade bond risk. A decline signals improvement in perceptions of credit quality.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings eased three basis points to 129, pushing the difference between the measures to 59 basis points from 107 on Aug. 27. The subordinated index declined 10 basis points today to 326.

Crossover Index

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings dropped seven basis points to 551.

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.

Bonds of Banque PSA Finance, the financing unit of PSA Peugeot Citroen, made up three of the top five price gainers in Bank of America Merrill Lynch’s EMU Non-Financial Corporates index.

The carmaker’s 4 percent bonds due 2015 climbed 0.54 cent today to 95.48 cents on the euro, pushing the yield to a two- week low of 6 percent, according to data compiled by Bloomberg. The securities slumped to a 2 1/2-month low of 94 cents on Oct. 1 as Europe’s second-biggest auto company suffers from the debt crisis in Europe, where it relies on the bulk of its sales.

Investor Meetings

France’s Societe Anonyme de Gestion de Stocks de Securite, or Sagess, was the first of two companies announcing plans for investor meetings in a day bare of any new European corporate bond sales. The company, which manages France’s strategic oil reserves, will meet investors across Europe in the week starting Oct. 8.

U.K.-based Great Places Housing Group Ltd. will also meet investors from Oct. 8.

Companies across Europe issued almost 50 billion euros ($64.5 billion) of debt in September, the busiest month for non- financial issuance since May 2009, data compiled by Bloomberg show.

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

To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net

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