Sovereign, Corporate Bond Risk Falls in Europe on Stimulus Bets

Credit-default swaps on sovereign and corporate bonds fell on speculation policy makers will take steps to resolve Europe’s debt crisis as Spain’s borrowing costs rise above 6 percent.

The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments fell 4.5 basis points to 320 at 10:15 a.m. in London. A decline signals improvement in perceptions of credit quality.

Federal Reserve Chairman Ben S. Bernanke is scheduled to testify on the outlook for the economy in Congress today after European Central Bank President Mario Draghi yesterday said he’s “ready to act” should the crisis worsen. Spain sold its benchmark 10-year bond at an average yield of 6.044 percent today, after Budget Minister Cristobal Montoro asked for outside help for the country’s banks on June 5.

“Hopes have risen that EU leaders are appreciating the urgency of the situation and that Spain is now accepting the need for outside help,” Jim Reid, head of fundamental strategy at Deutsche Bank AG in London, said in a note. “There is still a long way to go and the market has rallied on hopes rather than any proof of firm action to come.”

Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings dropped seven basis points to 704. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell two basis points to 174 basis points.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers fell 9.5 basis points to 281 and the subordinated index declined 19 to 457.

A basis point on a credit-default swap protecting 10 million euros ($12.6 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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