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Spain Leads Decline in Sovereign Bond Risk After Bill Auction

The cost of insuring against default on European sovereign debt fell after Spain’s Treasury sold 1.9 billion euros ($2.5 billion) of bills.

Credit-default swaps insuring Spanish debt declined 11 basis points to 498 basis points at 12:15 p.m. in London, the first drop in a week, according to data compiled by Bloomberg. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments dropped four basis points to 281. A decrease signals improving perceptions of credit quality.

The Spanish auction triggered an increase in the nation’s bonds even though the Treasury missed the maximum target and borrowing costs almost doubled. Credit markets were roiled yesterday after a Socialist victory in the first round of French presidential elections and the Dutch cabinet offered its resignation after a split over austerity measures.

“Spain managed to get the bills away and that’s positive in the midst of euro-zone uncertainty,” said Brian Barry, an analyst at Investec Bank Plc in London. “Yesterday there was a knee-jerk reaction to the negative news in France and Holland, but today the market has had time to digest the news and feel more confident.”

The cost of insuring company debt also declined. The Markit iTraxx Crossover Index of swaps linked to 50 companies with mostly high-yield credit ratings declined 10.5 basis points to 681.5. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings dropped three to 146 basis points.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers declined 4.5 basis points to 257.5 and the subordinated index dropped 4.5 to 417.5.

A basis point on a credit-default swap protecting 10 million euros ($13.2 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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