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Bond Risk Falls to 2010 Low in Europe After Fed Plays Taper Hand

The cost of insuring corporate bonds against losses fell to the lowest in almost four years in Europe after the Federal Reserve announced plans to reduce debt purchases while committing to near zero interest rates.

The Markit iTraxx Europe Index of credit-default swaps on 125 companies with investment-grade ratings dropped 2.5 basis points to 74 basis points at 9:25 a.m. in London, the lowest since March 2010. The Markit iTraxx Crossover Index of 50 companies with mostly speculative-grade ratings fell 10 basis points to 296.5 basis points, the lowest since October 2007.

The Fed said yesterday it will reduce monthly asset purchases to $75 billion from $85 billion, paring its quantitative easing program implemented to support the economy. The decision came after data this month showed improvements in employment, manufacturing and retail sales.

“The taper monkey is off our backs,” said Harpreet Parhar, a credit strategist at Credit Agricole SA in London. “I’m not sure markets have fully digested everything that has come out of the statement. It’s a reaction to the fact we have a path towards how tapering will end and it’s good to have that certainty.”

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