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Bond Risk Falls as German Growth Offsets Peripheral Concerns

The cost of insuring against default on European sovereign and corporate debt fell as the German economy grew more than forecast in the first quarter, helping the euro area avoid its second recession in three years.

The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments dropped two basis points to 293 at 11:11 a.m. in London. A decline signals improvement in perceptions of credit quality.

Germany expanded five times as much as economists had forecast, helping offset contractions in peripheral countries as the region’s sovereign crisis deepens. Speculation Greece will pay the holders of a foreign-law bond maturing today also helped underpin sentiment.

“The initial impetus to the market this morning was the German GDP figure,” said Jeroen van den Broek, head of developed market credit strategy at ING Groep NV in Amsterdam. “There’s a bit of relief Greece is committed to repaying its outstanding bond maturities.”

The 436 million-euro ($559 million) repayment would not commit a future Greek government to repay the remaining 6 billion euros of other foreign-law bonds that were not tendered into the country’s debt restructuring, state-run Athens News Agency reported, without saying how it got the information.

“Some people may see this as a stay of execution,” van den Broek said. “This will be a short term rally, not something the market will bounce on for days.”

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings decreased 2.5 basis points to 713.5, BNP Paribas prices show. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell three basis points to 166 basis points.

The cost of insuring financial debt also fell, even after Moody’s Investors Service cut the ratings of 26 Italian banks. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers declined 1.5 basis points to 278.5 and the subordinated index was five lower at 459.

A basis point on a credit-default swap protecting 10 million euros ($12.9 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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