Credit Risk Falls to 20-Month Low in Europe on U.S. Jobs Report

The cost of insuring against default on European junk-rated debt dropped to the lowest since July 2011 after a report showed the U.S. jobless rate fell to a five-year low.

The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly speculative-grade ratings dropped for a fifth day, declining 10 basis points to 405 at 1:40 p.m. in London. The benchmark is 47.5 basis points lower this week, heading for the biggest weekly fall since Jan. 4.

Automakers and builders are among U.S. companies planning to boost hiring, which will lead to gains in incomes that may help the nation’s economy weather federal cutbacks and higher taxes. European Central Bank President Mario Draghi said yesterday the region is seeing “the beginning of gradual recovery” and Italy’s deadlocked government will not affect efforts to repair the country’s finances.

“There’s the perception that the potential catalysts for a selloff have largely been well-flagged and are mostly under control for now,” said Joseph Faith, a credit strategist at Citigroup Inc. in London.

Employment rose 236,000 in the U.S. last month after a revised 119,000 gain in January that was smaller than first estimated, Labor Department figures showed today in Washington. The median forecast of 90 economists surveyed by Bloomberg projected an advance of 165,000. The jobless rate dropped from 7.9 percent. Hiring in construction jumped by the most in almost six years.

The premium investors demand to hold European high-yield corporate bonds rather than government notes has fallen to 462 basis points from 478 basis points on Feb. 26, according to Bank of America Merrill Lynch’s Euro Non-Financial High Yield Constrained Index.

Contagion ‘Muted’

The markets “have now reverted back more or less to what they were” before the Italian elections, Draghi said yesterday. “Contagion to other countries has been muted this time, contrary to what might have happened about a year and a half ago, and this is another positive sign.”

Telecommunications firms led European bond sales this week with non-financial companies including Royal KPN NV, AT&T Inc., and Telstra Corp. raising a total 5 billion euros ($6.5 billion) of debt, data compiled by Bloomberg show. That’s down from 7.6 billion euros last week, which was the busiest since Jan. 21, the data show.

In the credit derivatives market, the Markit iTraxx Europe Index of swaps on investment-grade companies fell two basis point to 105 today, while the Markit iTraxx Financial Index of credit-default swaps on 25 banks and insurers dropped 3.5 basis points to 119, the lowest since Jan. 28. A fall signals improvement in perceptions of credit quality.

Credit-default 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. A basis point on a contract protecting 10 million euros of debt for five years is equivalent to 1,000 euros a year.

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