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Euro Company Spreads Rise to Record Versus U.S.: Credit Markets

European Council President Herman Van Rompuy
European Council President Herman Van Rompuy makes a speech at the closing ceremony of the European Union-Latin American summit in Madrid. Photographer: Denis Doyle/Bloomberg

The risk of owning Europe’s corporate bonds is the highest on record relative to U.S. company debt as investors lose confidence lawmakers and central bankers can tame the region’s worsening fiscal crisis.

Yields on investment-grade bonds in euros rose to a 10-month high of 239 basis points, or 2.39 percentage points, more than government debt, according to Barclays Capital index data. That’s 41 basis points more than the spread for U.S. company notes, near the record 44 basis points reached May 27. European bond spreads were below those on dollar debt as recently as February, the indexes show.

Yields suggest debt investors are concerned Europe’s sovereign debt crisis will stifle growth and curb profits even after European Union President Herman Van Rompuy said yesterday a 750 billion-euro ($908 billion) rescue package will be increased if it fails to quell volatility. About 75 percent of investors and analysts expect some governments in the region to default or the 16-nation euro area to break up, according to a quarterly poll of Bloomberg subscribers.

“It’s largely fear driven,” said John Milne, chief executive officer of JKMilne Asset Management, who oversees about $1.8 billion in Fort Myers, Florida, and favors U.S. corporate bonds. “People like ourselves are holding onto positions, watching the market like a hawk.”

Standard & Poor’s raised the ratings on 201 U.S. companies and cut 183 this quarter, a ratio of 1.1 to 1, according to data compiled by Bloomberg. That compares with 51 upgrades and 127 downgrades in Western Europe, a ratio of 0.4 to 1.

Selling Buyout Debt

“Deficits in Europe remain massive and are going to weigh down the economic recovery,” said Juan Esteban Valencia, a London-based credit strategist at Societe Generale SA. He predicts Europe’s corporate bonds will continue to underperform their U.S. counterparts.

Elsewhere in credit markets, Emerging-market bonds rallied the most in two weeks. JPMorgan Chase & Co. sold $716.3 million of bonds backed by commercial mortgages in the second offering of the debt this year, according to a person familiar with the transaction.

The largest top-rated portion, maturing in 4.53 years, yields 140 basis points more than the benchmark swap rate, said the person, who declined to be identified because the terms aren’t public. The AAA rated slice maturing in about 9.53 years yields 165 basis points over the benchmark, the person said. A basis point is 0.01 percentage point.

Bank of New York

Bank of New York Mellon Corp. is marketing $500 million of five-year notes, according to a person familiar with the offering. The debt may yield as much as 97 basis points more than similar-maturity Treasuries, said the person, who declined to be identified because terms aren’t set. A basis point is 0.01 percentage point.

Bank of New York Mellon may issue the notes as soon as today, the person said. Barclays Plc and UBS AG are managing the sale for the New York-based bank.

The extra yield investors demand to own corporate bonds instead of government debt rose 1 basis point to 200 basis points, the highest since Oct. 16, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Average yields were 4.158 percent.

An indicator of corporate credit risk in the U.S. fell for a second day. Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, declined 0.3 basis point to a mid-price of 125.3 basis points as of 1:46 p.m. in New York, according to Markit Group Ltd.

European Credit Risk

The index, which typically falls when investor confidence improves and rises when it deteriorates, is down 6.8 basis points since reaching an 11-month high on June 9.

The cost of protecting European corporate bonds from default plunged the most in more than two weeks, with credit-default swaps on the Markit iTraxx Crossover Index of 50 mostly junk-rated companies dropping as much as 21.3 basis points to 581, according to Markit Group Ltd. The index was at 597.8 basis points as of 1:53 p.m. New York time, up 8.6 basis points for the week.

The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan fell 9 to 142 in Singapore, its biggest daily decline since May 27, according to Royal Bank of Scotland Group Plc and CMA DataVision.

BP Credit Swaps

The cost of insuring BP Plc’s bonds using credit-default swaps fell from a record, with contracts on the company declining 34.5 basis points to 443.5, according to CMA. Credit swaps on the company have surged since the April 20 explosion of the Deepwater Horizon rig that killed 11 people and triggered an oil spill.

BP’s $3 billion of 5.25 percent notes due in 2013 rose 3.125 cents to 95.375 cents on the dollar yesterday, after declining to as little as 89.94 cents the day before, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The yield declined to 6.8 percent, a premium of 534 basis points over similar-maturity Treasuries, down from 655 basis points.

Credit-default swaps tied to Spain’s two largest banks fell today, with Banco Santander SA dropping 18.5 basis points to 195.5 and Banco Bilbao Vizcaya Argentaria SA declining 24 basis points to 362, CMA prices show.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Emerging-Market Bonds

In emerging markets, yield spreads widened 9 basis points to 327 basis points, the biggest jump in a week, according to a JPMorgan index. The spread has ranged from this year’s low of 230 on April 15 to a high of 346 on May 20.

Spreads on European company bonds traded at an average of 64 basis points tighter than the yield premiums on U.S. debt before this year, according to Barclays Capital’s U.S. and euro aggregate corporate bond indexes dating back to 1998.

The debt in Europe has traded at or above U.S. bonds since Feb. 23, the data show. European notes, which carry an average maturity of five years, half that in the U.S., traded wider for the first time in December.

Banks in the U.S. are better bets than those in Europe because of their deposit bases, plenty of near-term liquidity and improving balance sheets, said Mark Kiesel, global head of corporate bond portfolio management at Pacific Investment Management Co. in Newport Beach, California.

‘Sick Patient’

“The U.S. banks look very compelling on a global basis relative to other banks,” said Kiesel, who oversees about $300 billion of credit investments for the firm, which also manages the world’s biggest bond fund. “In contrast, Europe looks like the sick patient.”

Companies sold 14 billion euros of bonds in Europe last month, an 89 percent decline compared with the same month last year, according to data compiled by Bloomberg. U.S. issuance totaled $35 billion last month, a 75 percent drop from the same period in 2009, Bloomberg data show.

Europe’s rescue fund for nations struggling with spiraling budget deficits, which is backed by 440 billion euros-worth of national guarantees, has had a “muted impact,” according to Jamie Stuttard, head of European and U.K. fixed income at Schroders Plc in London.

Stuttard, who oversees the equivalent of about 25 billion pounds ($37 billion), cited rising European government bond yields, led by Greece and including so-called Club Med nations such as Italy and Spain.

‘No Meaningful Impact’

“If the bailout was formed to prevent contagion to larger and more serious peripheral economies such as Spain, then the package seems to have had no meaningful impact,” Stuttard said. Lenders are being affected and “the market perceives that European banks are riskier than at any point in 2008,” he said.

Van Rompuy, a former Belgian prime minister who became the EU’s first full-time president in January, was the first European official to say the rescue fund may be expanded. He voiced confidence Greece won’t default and that no country will be forced to quit the euro.

Sovereign bond spreads have surged. The 10-year Greek bond yield reached 12.46 percent on May 7, the highest since the common currency was introduced in 1999. The yield plunged to 6.3 percent on May 10 after the rescue program was announced, before rising to 7.68 percent. It was 8.14 percent today.


Skepticism about euro-area rescue funds is “incomprehensible” and they are “significant programs,” European Central Bank Governing Council member Axel Weber said at a conference this week in Berlin. The Frankfurt-based ECB kept its main refinancing rate at a record-low 1 percent at yesterday’s monthly policy meeting to avoid stamping out the fragile economic recovery.

Spreads on company bonds in Europe and the U.S. are widening even as the World Bank raised its forecast for global economic growth this year and next, while acknowledging the risks posed by strained government budgets.

The world economy will expand 3.3 percent this year and by the same amount in 2011, up from January predictions of 2.7 percent for 2010 and 3.2 percent next year, the Washington-based World Bank said in a June 9 report. The bank said it saw a “high probability” of a “more muted recovery” because of accelerated efforts to trim deficits.

Risks to the global economic outlook have “risen significantly” and policy makers have limited room to provide support to growth, International Monetary Fund Deputy Managing Director Naoyuki Shinohara said.

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