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Company Bond Sales Surge on Short-Lived Spain Bailout Rally

The short-lived rally in European credit that followed news of the 100 billion-euro ($125 billion) bailout for Spanish banks was enough to trigger the busiest day for corporate bond sales since February.

General Electric Capital Corp., a unit of the U.S. conglomerate, together with phone operators France Telecom SA, and Milan-based Telecom Italia SpA were among borrowers taking advantage of a boost in investor sentiment. Poland sold its first euro-denominated bond in five months, while the European Investment Bank and lenders in the haven countries of Sweden, Norway and Germany also took the opportunity to raise money.

Spain became the fourth euro member to seek a bailout since the crisis began almost three years, spurring a rally that has since fizzled out. Stocks in Europe erased earlier gains and the cost of insuring against a Spanish default reversed the biggest drop this year.

“A lot of issuers were forced onto the sidelines during April and May as the euro crisis deepened,” said Robin Marshall, director of fixed income at Smith & Williamson Investment Management Ltd. in London, which manages about $18 billion. “One of the lessons of the euro debt crisis has been that these relief rallies can turn to dust pretty quickly.”

GE Sale

GE Capital issued 1.25 billion euros of 2.875 percent bonds due June 2019, according to a banker involved in the deal. France Telecom, the country’s largest phone company, sold 1 billion euros of 10-year notes, while Telecom Italia offered 1.5 billion euros of bonds due in June 2015 and December 2018.

Credit-default swaps insuring Spanish sovereign bonds fell as much as 30 basis points, the most since Dec. 5, before climbing seven basis points to 594 as of 4:20 p.m. in London.

The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments declined as much as 10.5 basis points to 311, the lowest since May 29, before rising 2.5 basis points to 322.5. A decline signals an improvement in perceptions of credit quality.

Spanish bonds fell, pushing 10-year yields up 30 basis points to 6.52 percent. The government asked for 2.7 times the funds deemed necessary by the International Monetary Fund to rescue its banks amid concern about bad assets and public finances.

Financial Yields

Yields on non-financial debt in Europe held at 2.6 percent, according to Bank of America Merrill Lynch index data, which tracks rates back to 1998. The Markit iTraxx Financial Index of credit-default swaps linked to the senior debt of 25 European banks and insurers rose seven basis points to 286, reversing an earlier decline.

Poland raised 1.5 billion euros from its sale of securities due in 2023, while the Luxembourg-based EIB added 350 million euros to its existing 2.625 percent bonds due in March 2020, bankers familiar with the transactions said.

Svenska Handelsbanken AB in Stockholm sold 1.25 billion of senior, unsecured bonds due in 2018. DNB Boligkreditt AS, Norway’s biggest bank, issued 1.5 billion euros of seven-year covered bonds, while Deutsche Hypothekenbank AG raised 500 million euros from its sale of the asset-backed notes. Volkswagen Leasing GmbH sold 1 billion euros of bonds due September 2015.

Junk Risk

The Markit iTraxx Crossover Index of default swaps on 50 companies with mostly high-yield ratings rose one basis point to 697. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings climbed two basis points to 178.5.

Swaps on Italy, whose bond yields were dragged higher as the crisis spread, rose eight basis points to 551, Bloomberg data show. The price earlier dropped to the lowest this month.

Contracts on Ireland, which requested a bailout in November 2010, declined 10 basis points to 673, while Portugal, which asked for a rescue in April 2011, fell the equivalent of 54 basis points to 1,055. Swaps on Greece were settled this year after the government restructured its debt.

A basis point on a credit-default swap protecting 10 million euros 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.

“The half-life of bail-outs has got increasingly shorter over the last couple of years,” Jim Reid, head of fundamental strategy at Deutsche Bank AG in London, wrote in a note to investors. “That we have some action is a positive.”

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