European Debt Risk Heads For Biggest Weekly Drop Since September

The cost of insuring European debt against default is heading for the biggest weekly drop since September amid optimism European leaders will let Greece get its next aid installment and on new signs of economic recovery.

The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings fell 55 basis points to 512 this week, the steepest fall since Sept. 7. Bond sales slowed to 9.8 billion euros ($12.6 billion) this week, compared with an average 14 billion euros for the year, data compiled by Bloomberg show.

Euro-area finance ministers are meeting on Nov. 26 to discuss unlocking funds for Greece, after failing to reach an agreement on Nov. 21. Credit markets were buoyed as a report showing an unexpected rise in German business confidence added to data this week from the U.S. and China signaling the world’s largest economies are recovering.

“The concerns over the Greek situation appear to have receded somewhat, despite the fact they have yet to actually reach firm agreement,” said Brian Barry, an analyst at Investec Bank Plc in London. Demand for corporate debt has remained relatively strong, “although at this stage we are getting closer to the end of year issuance window,” he said.

Danone SA, the Paris-based yogurt maker, and truckmaker Volvo AB were among companies, banks and agencies that took advantage of record-low borrowing costs to sell bonds this week. The yield on European corporate debt has dropped 220 basis points to 2.2 percent this year, according to Bank of America Merrill Lynch’s EMU Corporates Index.

Swap Drop

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings declined 13 basis points this week to 124, the biggest drop since September. The measure rose one basis point today as of 11:40 a.m. in London.

The Markit iTraxx SovX Western Europe Index of credit-default swaps on 14 governments fell five basis points this week to 114. A fall in credit-default swaps signals improved perceptions of credit quality.

The Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers declined 21 basis points this week to 165 and the subordinated measure dropped 31 basis points to 288.

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.

-- Editors: Andrew Reierson, Michael Shanahan

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