Draghi Reassessment Spurs Euro Credit Rally Amid Payrolls Boost

ECB President Mario Draghi
Investors were initially disappointed when ECB President Mario Draghi failed yesterday to spell out full details of a bond-buying plan to ease the region’s crisis. Photographer: Hannelore Foerster/Bloomberg

An index of European credit risk rallied the most in nine months after investors reassessed the central bank’s bond-buying program and a U.S. employment report gave cause for optimism.

The Markit iTraxx Crossover Index of credit-default swaps on 50 mostly junk-rated companies fell 52 basis points to a four-month low of 597 at 4:31 p.m. in London, implying an improvement in investor sentiment. Contracts on Spain plunged 32 basis points to 539, snapping three days of increases on expectations the European Central Bank will buy short-dated bonds of peripheral euro-region countries.

“There were further statements of intent yesterday but a lack of immediate action, so markets reacted quite negatively,” said Brian Barry, a fixed-income analyst at Investec Bank Plc in London. “It does however look as if we’re likely to see some form of intervention in the not-too-distant future, which is supporting markets.”

Investors were initially disappointed when ECB President Mario Draghi failed yesterday to spell out full details of a bond-buying plan to ease the region’s crisis. U.S. payrolls added a better-than-expected 163,000 workers in July even as the jobless rate rose to a five-month high of 8.3 percent, according to the Labor Department in Washington.

Weekly Rally

The Crossover index fell the most since October, rallying from its 29 basis-point jump yesterday which was the biggest increase in high-yield European corporate credit risk since May 23, according to prices compiled by Bloomberg. The gauge posted a fourth weekly decline, falling 43 basis points since July 27.

The Markit iTraxx Europe Index of swaps on 125 companies with investment-grade ratings fell 17 basis points to 151, the lowest since May 8. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers dropped 30 basis points to 249, after yesterday rising by the most since Nov. 1. A subordinated bank-risk gauge dropped 42 basis points to 407, Bloomberg prices show.

Sovereign bond risk fell, with the Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments dropping eight basis points to 253, the lowest since this series of the gauge started trading in March.

France, Italy

Swaps on France’s government bonds declined 15 basis points to 151, the most since Jan. 19 and within five basis points of the lowest level since August 2011. Italy fell 47 basis points, the most since June 29, to 475 basis points. Ireland was 31.5 basis points lower at 481, the lowest since November 2010.

Speculation that the ECB’s bond-purchase program will focus on shorter-dated securities meant Spain and Italy’s two-year government notes outperformed their 10-year bonds today.

Christoph Rieger, the head of interest-rate strategy at Commerzbank AG in Frankfurt, warned that Draghi’s plan could be “meaningless” if the central bank limits itself to buying securities with a maximum one-year maturity.

A basis point on a credit-default swap protecting 10 million euros ($12.2 million) of debt for five years is equivalent to 1,000 euros a year. Contracts pay the buyer face value in exchange for the underlying notes or the cash equivalent should a borrower fail to adhere to its agreements.

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