Sovereign, Financial Bond Risk Falls on Crisis Resolution Bets

The cost of insuring European sovereign and financial debt fell to the lowest levels in a month, extending the biggest-ever weekly decline, on speculation leaders are closer to resolving the region’s crisis.

The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments declined eight basis points to 318 at 2:30 p.m. in London. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers dropped for a sixth day, falling 31.5 basis points to 255, according to JPMorgan Chase & Co.

German Chancellor Angela Merkel and French President Nicolas Sarkozy met in Paris today to try to reach agreement on the stricter enforcement of budget rules ahead of a European Union summit in Brussels on Dec. 9. Investors are betting that will clear the way for more intervention from the European Central Bank after the breakdown of recent agreements fueled speculation the euro area was on the brink of collapse.

“There is considerable investor sentiment that something good will materialize,” Scott MacDonald, the head of research at Aladdin Capital in Stamford, Connecticut, wrote in a note. “A failure to herd the 17 euro-zone cats into a viable sovereign debt resolution program” will have “far-reaching consequences for markets,” he wrote.

Merkel said today that European leaders will seek to “win back a bit of trust” at the summit. “We are in a difficult situation and we have to win back confidence, because the issue of our reliability has suffered,” Merkel told reporters in Paris today after meeting with Sarkozy.

Subordinated Debt

A measure of subordinated financial debt risk tumbled 45 basis points to 460, JPMorgan prices show. A decline signals improvement in perceptions of credit quality.

Swaps on Belgium dropped 18 basis points to 272, according to CMA. The country will get a full-time government as soon as today, ending 540 days of post-election brinksmanship between the Dutch-speaking north and French south.

France fell 12 basis points to 184, Germany was five lower at 92, Italy tumbled 20 to 428 and Spain fell 34 to 348.

The cost of insuring corporate debt also dropped to the lowest in a month. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings declined for an eighth day, dropping 12.25 basis points to 166.75, JPMorgan prices show.

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings decreased 36.5 basis points to 708.5.

A basis point on a credit-default swap protecting 10 million euros ($13.4 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.

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