Corporate Credit Risk Drops to Three-Year Low as RBA Fuels Rally
The cost of insuring European corporate debt fell to the lowest in three years as credit markets rallied after the Reserve Bank of Australia followed the European Central Bank in cutting interest rates.
The Markit iTraxx Europe Index of credit-default swaps on 125 companies with investment-grade ratings dropped 1.5 basis points to 91, the lowest since May 2010.
The RBA cut its benchmark rate to a record low of 2.75 percent today to bolster an economy that’s been weakened by the strong Aussie dollar. After the ECB cut its benchmark rate to an all-time low last week, President Mario Draghi said yesterday that further interest-rate cuts are possible. The latest stimulus compounds a global credit rally fueled last month by the Bank of Japan’s plan to buy more than 7 trillion yen ($70.6 billion) of bonds a month.
“Rate cuts from the ECB and now the RBA point to a continuation of flows into credit for now, and many investors holding short index positions have been forced to capitulate, keeping spreads grinding tighter,” said Joseph Faith, a credit strategist at Citigroup Inc. in London. “Despite deteriorating economic fundamentals in Europe, the Bank of Japan’s massive asset purchase plan is adding liquidity to the market whilst restricting the supply of other assets to buy.”
Hutchison Whampoa Ltd. (13) plans to sell euro-denominated hybrid bonds in its first issuance of securities in the currency in a year, according to a person familiar with the deal. The securities for the Hong Kong-based company controlled by billionaire Li Ka-shing combine features of debt and equity and will be callable after five years.
The notes are being issued through Hutchison Whampoa Europe Finance (13) Ltd.
The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with high-yield credit ratings declined 2.5 basis points to 375 basis points, the lowest since June 2011. A decrease signals improvement in perceptions of credit quality.
The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers was little changed at 131.5 basis points, and the subordinated index declined one basis point to 213.
A basis point on a credit-default swap protecting 10 million euros ($13.1 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.
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