The cost of insuring against default on Italian government debt rose to a record after LCH Clearnet SA increased the extra deposit it demands from clients to trade the country’s securities.
Credit-default swaps on Italy jumped 38 basis points to 562 at 12 p.m. in London, surpassing the previous record of 534 set Sept. 22, according to CMA. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments increased 13 basis points to a one-month high of 341.
The move by Europe’s largest clearing house triggered a slump in Italian bonds, with the yield on 10-year notes rising to a euro-era record of 7.48 percent. Markets had rallied after Prime Minister Silvio Berlusconi said last night he’d step down as soon as the country’s parliament passed cost-cutting steps pledged to European Union allies.
“Berlusconi’s offer to resign has been spectacularly offset by the Clearnet margin increase,” said Suki Mann, a strategist at Societe Generale SA in London. “It’s heaped more pressure on Italy and there’s obviously a knock-on effect on the rest of the market.”
The cost of default insurance rose elsewhere in Europe, with credit swaps on Belgium climbing 15.5 basis points to 307.5, close to the record 310. France increased eight basis points to 192 and Germany rose five basis points to 93, CMA prices show. Contracts on Ireland were 17 basis points higher at 749 and Spain rose 25 to 425, approaching the all-time high 433.
Yield Curve Inverts
Italy’s two-year note yield rose to as high as 7.33 percent, Bloomberg data show. At one point the so-called yield curve inverted, another sign of stress that means two-year yields were higher than those on longer-dated debt. Default swaps protecting Italian debt for five years have exceeded 10-year contracts since July, according to CMA.
Italian borrowers led an increase in the cost of insuring corporate debt. Swaps on oil company ENI SpA rose 31 basis points to a record 221 while contracts tied to power generator Enel SpA jumped 49 to 376, the highest since March 2009.
Compagnie Industriale Riunite SpA, which owns the la Repubblica newspaper, surged 159 basis points to 979 and Telecom Italia SpA rose 48 to 515. Swaps on Intesa Sanpaolo SpA, Italy’s second-biggest bank, increased 47 to 441, while insurer Assicurazioni Generali SpA rose 40 to 360.
The Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings increased 24 basis points to a three-week high of 750.5, according to JPMorgan Chase & Co.
The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 5.75 basis points to 182. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers jumped 15.5 basis points to 268.5, the highest since Oct. 5, and the subordinated index rose 20 to 495.
A basis point on a credit-default swap protecting 10 million euros ($13.6 million) 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.