Telefonica Sells 10-Year Bonds as Spreads Tightest Since 2008

Telefonica SA bonds fell as Spain’s largest phone operator sold 1.5 billion euros of 10-year debt, making it the third borrower from Europe’s weakest countries to sell at that maturity since the beginning of 2012.

Telefonica’s 4.71 percent notes due 2020 dropped 0.2 percent to 108.98 cents on the euro, one of the worst performers in Bank of America Merrill Lynch’s Euro Non-Financial Corporate Index. That sent the yield premium to benchmark government debt up three basis points to 213, data compiled by Bloomberg show.

The Madrid-based company is taking advantage of a rally in credit markets that has pushed relative yields on corporate bonds to the lowest since January 2008. The spread over sovereign debt has fallen to 136 basis points, according to Bank of America Merrill Lynch’s Euro Corporate index, compared with 301 basis points at the start of 2012.

“The issuer is plugging into the favorable environment and locking in longer-term funding while the iron is hot, and it will probably stay hot,” said Suki Mann, a strategist at Societe Generale SA in London. “There’s not enough supply and huge demand.”

Spain’s Banco Popular Espanol SA, Portugal’s Banco Espirito Santo SA and the Irish government also sold bonds in euros.

Investors are hungry for securities from Europe’s weakest nations as they seek higher returns from riskier assets. The relative spread of euro periphery non-financial companies is at its lowest since July 2011, according to Bank of America Merrill Lynch’s Euro Periphery Non-Financial Index.

Credit-Default Swaps

The cost of insuring against default on Telefonica debt has tumbled to an 18-month low, with credit-default swaps dropping to 206 basis points from a record 572.5 in June.

The new bonds were sold at a spread of 230 basis points more than the benchmark swap rate. It’s the third 10-year deal sold by a peripheral corporate issuer since January 2012, following SNAM SpA in September and Enel SpA a month later, and the fifth since the start of 2011, according to SocGen data.

GE Capital European Funding sold 1 billion euros of 10-year bonds at 100 basis points over swaps and 1 billion euros of 5-year bonds at a spread of 75 basis points.

In credit derivatives markets, the cost of insuring European corporate debt was little changed. The Markit iTraxx Crossover Index of credit-default swaps linked to 50 companies with mostly high-yield credit ratings declined 1.5 basis points to 428.

iTraxx Europe

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was unchanged at 103 basis points. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers rose one basis point to 123.5 and the subordinated index declined two to 201.

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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