The cost of insuring against default on European corporate debt fell, heading for a sixth month of declines, as central bank stimulus and confidence the economy is recovering fuels demand for higher yielding assets.
The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield ratings dropped four basis points to 493.5 at 10:30 a.m. in London. Telenor ASA, the Nordic region’s biggest phone operator, is selling benchmark senior unsecured bonds due in 2024.
Corporate borrowing and insurance costs are tumbling as European Central Bank President Mario Draghi’s unlimited lending program and $2.4 trillion of bond purchases by the Federal Reserve to stimulate the economy give banks and investors more cash to buy fixed-income securities. The rally is also being fueled by confidence in China’s economy, which is at the highest in more than a year, and optimism U.S. politicians will reach an agreement to avoid the so-called fiscal cliff of spending cuts and tax increases.
“Continued stimulus and liquidity support and conviction the ECB will continue to do what it needs to do have meant you have to invest in credit, there is nothing else,” said Simon Ballard, a credit strategist at National Australia Bank in London. “We’re going to continue to grind tighter into year end, but investors are becoming more discerning.”
The high-yield measure is down from 529 basis points on Oct. 31 and 720 on May 31, signaling improvement in perceptions of credit quality. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 0.5 basis point to 122.5, compared with 130 last month and 180 six months ago.
The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers fell one basis point to 159 and the subordinated index declined 1.5 to 279.
A basis point on a credit-default swap protecting 10 million euros ($13 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.