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Corporate Credit Risk Declines to Seven-Month Low in Europe

March 14 (Bloomberg) -- The cost of insuring against default on European corporate debt fell to the lowest in seven months as optimism about the strength of the U.S. economy overshadowed concerns that Europe’s debt crisis may spread.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings dropped four basis points to 125.75, the lowest since Aug. 2, according to JPMorgan Chase & Co. at 11:30 a.m. in London. A decline signals improvement in perceptions of credit quality.

The Federal Reserve said yesterday that strains in global financial markets have eased, the labor market is gathering strength and 15 of the nation’s largest 19 banks could maintain adequate capital levels even in a recession. Spanish Prime Minister Mariano Rajoy repeated calls for a bigger European bailout fund as he struggles to meet budget-deficit targets.

“The mood is quite good,” said Suki Mann, a strategist at Societe Generale SA in London. “We have one eye on Spain, but the market’s in upbeat mode and wants to buy risk.”

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings fell as much as 20 basis points to 547, the lowest since Aug. 4, before trading at 548.5.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers declined 10 basis points to 198 and the subordinated index was down 13 to 337, both the lowest in a month, JPMorgan prices show.

A basis point on a credit-default swap protecting 10 million euros ($13.1 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.

To contact the reporter on this story: Abigail Moses in London at amoses5@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net

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