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Junk Credit Risk Drops to Two-Year Low in Europe on Fed Stimulus

The cost of insuring high-yield corporate bonds against losses dropped to the lowest in more than two years in Europe after the Federal Reserve unexpectedly refrained from paring monetary stimulus.

The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly speculative-grade credit ratings fell 11 basis points to 365 at 4:30 p.m. in London, the lowest since May 2011. Telecom Italia SpA (TIT), Italy’s biggest phone company, and Swisscom AG were among companies that sold bonds in Europe today.

The Federal Open Market Committee said it wants more proof of an economic recovery before curbing its $85 billion-a-month asset-buying program, surprising analysts predicting a $5 billion cut to Treasury purchases. Chairman Ben S. Bernanke said there is no fixed schedule for tapering, which could still start this year should data confirm the Fed’s “basic outlook.”

“It’s a positive knee-jerk reaction, but whether it translates into an ongoing rally is debatable,” said Hans Lorenzen, a credit strategist at Citigroup Inc. in London. “With more liquidity than expected, markets are anticipating that excess demand for securities will continue for longer. That’s supportive for higher-risk assets in particular.”

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings dropped four basis points to 89, the lowest level in four months. A decrease signals an improvement in perceptions of credit quality.

New Issues

The yield investors demand to hold junk-rated company bonds fell two basis points to 4.9 percent yesterday, the lowest in almost three weeks, according to Bloomberg bond index data.

In the new issue market, Milan-based Telecom Italia sold 1 billion euros ($1.4 billion) of seven-year bonds to yield 330 basis points more than the midswap rate, data compiled by Bloomberg show. The company has the lowest investment grade ranking from all three major ratings companies with a negative outlook.

Swisscom (SCMN), Switzerland’s biggest phone company, issued 500 million euros of seven-year bonds through its Lunar Funding V unit. The notes yield 40 basis points more than swaps.

Australia Pacific Airports Melbourne Pty Ltd., the owner and operator of Melbourne Airport, raised 550 million euros from a sale of 10-year securities yielding 105 basis points more than swaps. It was the company’s first sale of securities in euros, Bloomberg data show.

Hapag-Lloyd AG, a German liner shipping company, is meeting investors for a sale of 200 million euros of five-year high-yield notes. It would be the Hamburg-based company’s first bond sale since 2010, Bloomberg data show.

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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