Corporate Default Swaps Rise in Europe as Credit Rally Stalls

The cost of insuring against default on European corporate debt rose after the biggest weekly rally in more than a month.

The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings rose six basis points to 500 at 3:30 p.m. in London, after falling 48 basis points last week. UniCredit SpA (UCG), Italy’s biggest bank, is selling 10-year subordinated bonds.

The rally, which is into its fifth straight month in the longest streak since April (APR) 2011, has stalled before earnings reports from companies including tiremaker Michelin & Cie today and Banco Santander SA (SAN) on Oct. 25. Sales of corporate bonds slowed to 8 billion euros ($10.5 billion) last week from 16 billion euros the week before.

“The coming week will be punctuated by the results season, with more than 30 European firms presenting their quarterly results,” Guillaume Thomas, a quantitative analyst at Credit Agricole SA (ACA) in Paris, wrote in a note to investors. “At the end of the week we should have a good indication of the state of the economy’s health and thus the trend for the end of the year.”

Corporate bond yields relative to government debt held at 124 basis points, the lowest since July 2011, according to Bank of America Merrill Lynch’s EMU Corporates Non-Financial Index. The spread has shrunk from 201 at the start of the year amid increasing investor confidence that Europe’s leaders can contain the region’s debt crisis.

UniCredit LT2

UniCredit is selling 1.25 billion euros of lower tier 2 bonds at a yield of 510 basis points more than the swap rate, down from a spread of about 530 in initial marketing, according to a person familiar with the matter, who asked not to be named because they’re not authorized to speak about it.

Deutsche Bahn AG, Germany’s state-owned railway, sold 300 million pounds ($481 million) of five-year bonds in its second offering in the U.K. currency in four months, data compiled by Bloomberg show.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose two basis points to 123. An increase signals deterioration in perceptions of credit quality.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers rose one basis point to 163 and the subordinated index increased three to 290.5.

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 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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