Contracts protecting against losses on Portuguese sovereign and corporate bonds led increases in Europe’s credit-default swap markets as the nation’s borrowing costs jumped.
Swaps insuring Portugal’s sovereign debt surged as much as 105 basis points to 507, the biggest advance since May 2010 and the highest level in eight months, according to data compiled by Bloomberg. Contracts on EDP-Energias de Portugal SA, the country’s biggest utility, climbed 61 basis points to 394 basis points at 12:25 p.m. in London, while Banco Comercial Portugues SA increased 49 basis points to 596 and Banco Espirito Santo SA rose 47 basis points to 562.
Portugal’s 10-year bond yield topped 8 percent for the first time this year after two ministers quit the coalition government, putting budget cuts at risk as the country works to meet the terms of its bailout program. Rating downgrades of European banks and unrest in Egypt also drove up credit risk.
“Portugal is almost certainly going to become a crisis,” Bill Blain, a strategist at Mint Partners Ltd in London, wrote in a note to clients today. “When politicians walk away from government, you know a new election is coming. That’s the point economic reform dies.”
The cost of insuring European corporate debt against default rose to the highest in a week, signaling deterioration in perceptions of credit quality.
The Markit iTraxx Crossover Index of default swaps on 50 companies with mostly high-yield credit ratings climbed 21 basis points to 477. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings added 5 basis points to reach 119.
The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased 13 basis points to 176 and the subordinated index rose 20 to 262.
Swaps on Barclays Plc gained 10 basis points to 165 after Standard & Poor’s cut its credit rating to A from A+. The ratings company said the London-based bank, along with Deutsche Bank AG and Credit Suisse Group AG, are among the most exposed to proposed regulatory rules that could threaten revenue.
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.
In the new issue market today, GDF Suez SA, Europe’s biggest utility by market value, plans to sell about 2 billion euros equivalent of hybrid bonds, according to a person familiar with the transaction, who asked not to be identified because the details are private.
The Courbevoie, France-based company is selling the bonds in three parts, the person said. The company can buy back the two euro-denominated portions after five and eight years, while the notes in pounds are callable after 5 1/2 years. GDF is also offering to buy back as much as 1.3 billion euros of notes due 2015 to 2020, the company said in a statement today.
Companies have sold a record 13.6 billion euros of hybrid bonds this year, according to data compiled by Bloomberg. The securities combining elements of debt with equity allow them to bolster capital without diluting shareholders.
The average yield investors demand to hold investment-grade corporate bonds in euros fell to 2.22 percent after reaching a seven-month high of 2.38 percent on June 24, Bank of America Merrill Lynch index data show. The notes lost 1.57 percent in June, the worst returns since November 2011, according to the data.