Japan Corporate Bond Risk Surges to Seven-Month High on Greece

The cost of insuring Japanese corporate debt from default surged to the highest in more than seven months amid concern Greece may have to leave the euro.

The Markit iTraxx Japan index advanced 7 basis points to 218.5 basis points as of 9:27 a.m. in Tokyo, Citigroup Inc. prices show. The benchmark is on course for its highest close since Oct. 5, according to data provider CMA. Japanese stocks fell, extending the longest streak of weekly losses since the Sept. 11 attacks in 2001. The nation’s 10-year-note yield plunged to the lowest since July 2003.

“The market has priced in the worst case scenario,” which is Greece’s exit from the euro zone, Toshiyasu Ohashi, the head of credit research in Tokyo at Daiwa Securities Co., said today in a phone interview. The focus is on Greece’s new election being held in June, he said.

Greece will hold new elections after President Karolos Papoulias failed to broker a governing coalition following an inconclusive May 6 vote. The standoff has reignited concern the country will renege on pledges to cut spending as required by the terms of its two bailouts worth 240 billion euros ($304 billion) negotiated since May 2010, and, ultimately, leave the euro area.

Japan’s government bond yield slid after Fitch Ratings yesterday downgraded Greece to CCC from B-, citing heightened risk the nation may not be able to sustain membership in the monetary union. The yield on the 10-year security fell 3 basis points to 0.815 percent as of 12:39 p.m. in Tokyo, data compiled by Bloomberg show.

Asian stocks fell, erasing this year’s gains. The MSCI Asia Pacific Index decreased 2.1 percent as of 11:55 a.m. in Tokyo and is down 0.9 percent this year. The Topix index dropped 2.4 percent to 729.06 as of 12:10 p.m. in Tokyo. A rating cut of Spanish banks further fueled concern Europe’s debt crisis is deepening.

The euro dropped to a four-month low, heading for a third weekly decline.

The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan climbed 8 basis points to 201.5 as of 8:04 a.m. in Hong Kong, Royal Bank of Scotland Group Plc prices show. The index is poised to close at its highest since Jan. 16, CMA prices show.

The Markit iTraxx Australia index rose 7 basis points to 202 basis points as of 10:18 a.m. in Sydney, Westpac Banking Corp. prices show. The gauge is set for its highest since Nov. 29, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Credit-default swap indexes are benchmarks for protecting bonds against default and traders use them to speculate on credit quality. A drop signals improving perceptions of creditworthiness, while an increase suggests the opposite.

The swap contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements. A basis point is 0.01 percentage point.

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