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Australia Bond Risk Falls to April Low on Europe, U.S. Optimism

The cost of insuring Australian company bonds from default fell to the least since April after U.S. economic data beat estimates and as leaders in Europe plan debt-crisis talks. Bond risk in Asia also dropped.

The Markit iTraxx Australia declined 2 basis points to 153 basis points at 10:54 a.m. in Sydney, National Australia Bank Ltd. prices show. The gauge is on course for the lowest close since April 6, according to data provider CMA.

Market sentiment improved last week amid optimism central banks would take more measures to promote growth and as U.S. data showed signs of sustained expansion in the world’s largest economy. The yield premium on ICICI Bank Ltd.’s February 2018 bonds, the largest dollar-denominated debt sale from the Asia-Pacific region last week, narrowed to 366 basis points today from 400 when the notes were sold on Aug. 14, BNP Paribas SA prices show.

The credit-default swap rally is the “result of much better rhetoric out of Europe, strong U.S. economic numbers and a lack of bad news headlines,” said Jason Watts, the Sydney-based head of credit trading at National Australia Bank. “There’s also a fear of fund managers missing out on returns and a self-fulfilling risk on trade as funds scramble for assets.”

The extra yield investors demand to hold Australian corporate bonds instead of government debt was 229 basis points on Aug. 16, the least since September, according to Bank of America Merrill Lynch index data. The spread was 243 basis points at the beginning of August.

Europe Talks

Europe’s lenders are planning a week of intensive shuttle diplomacy to help defuse the continent’s debt crisis amid dissension on the European Central Bank’s role and how to help Greece.

The ECB is considering setting limits on yields of euro area sovereign debt by pledging unlimited bond purchases, Germany’s Spiegel magazine reported yesterday, without saying where it obtained the information.

An index of U.S. leading economic indicators climbed more than forecast in July, and consumer confidence unexpectedly improved this month, data released Aug. 17 showed.

ICICI’s $750 million offering last week was the largest of three sales by Indian banks, the only borrowers from the Asia-Pacific region to sell U.S. dollar bonds in the period, according to data compiled by Bloomberg.

Indian Overseas Bank’s $500 million of securities were yielding 376 basis points more than Treasuries as of 9:55 a.m. in Mumbai, from an issue spread of 405 basis points on Aug. 13, BNP prices show.

Union Bank of India’s $350 million of five-year bonds, priced to yield 390 basis points more than the benchmark on Aug. 15, offered a 385 basis-point premium today, the prices show.

Bond Risk

The Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan fell 2 basis points to 147.5 as of 8:52 a.m. in Hong Kong, Royal Bank of Scotland Group Plc prices show.

The Markit iTraxx Japan index was little changed at 186 basis points as of 9:48 a.m. in Tokyo, Citigroup Inc. prices show. The benchmark has traded between 184 and 207 basis points this month, according to CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Credit-default swap indexes are benchmarks for insuring 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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