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Sovereign, Corporate Bond Risk Falls Before ECB Policy Meeting

The cost of insuring against default on sovereign and corporate debt fell before the European Central Bank meets today to decide on interest rates.

The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments fell six basis points to 322, according to Bloomberg prices at 11 a.m. in London, signaling improvement in perceptions of credit quality. The measure is down from 330 basis points June 1, the highest since the series started trading in March.

ECB President Mario Draghi is under pressure to cut rates to a historic low and provide more support for banks as the sovereign debt crisis forced Spain to ask for outside support for the first time. Officials meeting in Frankfurt will leave the benchmark rate at 1 percent, according to 32 of 44 economists surveyed by Bloomberg News, though 12 forecast a cut.

“My own expectation is that they will not ease policy today,” said Riccardo Barbieri, chief European economist at Mizuho International Plc in London. “Today’s a bit of short covering, and the trick for Draghi is not to give an easy way out to European politicians, but at the same time to convey to the market that the ECB will not let things fall apart.”

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings dropped 18 basis points to 720. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell five to 179 basis points.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers fell eight basis points to 295 and the subordinated index declined 11 to 486.

A basis point on a credit-default swap protecting 10 million euros ($12.5 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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