Europe Bond Risk Surges to Two-Month High as Fed Signals QE Exit

The cost of insuring European corporate bonds against losses surged to the highest in more than two months after the Federal Reserve confirmed it will begin withdrawing stimulus if the economy continues to improve.

The Markit iTraxx Europe Index of credit-default swaps on 125 companies with investment-grade ratings rose 8.6 basis points to 116 at 8:13 a.m. in London, the highest level since April 5, Bloomberg data show. The Markit iTraxx Crossover Index of contracts on 50 high-yield companies increased 34 basis points to 477, the biggest jump since March 20.

Fed Chairman Ben S. Bernanke said the central bank could start winding down its $85 billion in monthly bond purchases later this year and will end them completely by mid-2014 as long as the world’s largest economy performs in line with its projections. Credit risk began rising in May as Bernanke signaled a potential tapering of the stimulus that drove credit-default swaps on European corporate debt to the lowest in more than three years.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers rose 11 basis points to 165, while the subordinated index climbed 15 basis points to a one-week high of 242. An increase signals deterioration in perceptions of credit quality.

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 ($1,326) 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: Katie Linsell in Madrid at klinsell@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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