The yield premium investors demand to hold corporate bonds in Europe dropped to the lowest in eight weeks as company note sales slow and credit risk declines to the least since May.
The extra yield investors demand for investment-grade bonds in euros rather than government securities dropped 3.6 basis points to 103.4 basis points yesterday, the lowest since June 11, Bloomberg index data show. Spreads on high-yield securities narrowed 6.8 basis points to 396.5, the least since May 30, the data show.
Borrowing costs have fallen since Federal Reserve Chairman Ben S. Bernanke reassured markets last month that there is no preset course for the withdrawal of stimulus measures. The Markit iTraxx Europe Index of credit-default swaps on 125 companies with investment-grade ratings declined 1.8 basis points today to 92.6, the lowest since May 22. Issuance of bonds denominated in euros stalled after sales fell last week to the least this year.
“In recent weeks we’ve seen little new issuance, so the supply-demand balance has been in favor of tightening,” said Oliver Woyda, a money manager at Deka Investment GmbH in Frankfurt, which oversees about 20 billion euros ($26.5 billion). “The trend of rising interest rates, triggered by concern of the Fed slowing stimulus, has stopped at least temporarily which is also supportive.”
National Australia Bank is selling three-year covered floating-rate notes in pounds, according to a person familiar with the transaction, who asked not to be identified because the details are private. The notes, which will be backed by Australian residential mortgages, are being offered to investors to yield about 30 basis points more than three-month sterling Libor.
The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings fell 7.5 basis points to 384.5, the lowest since May 22. A decrease signals improvement in perceptions of credit quality.
The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers dropped 2.4 basis points to 132, also a 10-week low.
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.