Rate Bets Fuel Longest Rally Since 2009 in Europe Default Swaps

The cost of insuring against default on European corporate debt fell for a seventh day amid optimism Italy will end nine weeks of political deadlock and the European Central Bank will cut interest rates this week.

The Markit iTraxx Europe Index of credit-default swaps linked to 125 companies with investment-grade ratings fell five basis points to a two-year low of 100.5 at 4 p.m. in London. The decline, which signals improvement in perceptions of credit quality, is the longest since September 2009, according to data compiled by Bloomberg.

Italian Prime Minister Enrico Letta may finish installing a government today two months after voters rejected the previous administration’s budget-cutting agenda. ECB policy makers will cut the benchmark rate to 0.5 percent when they meet on Thursday, according to the majority of economists in a Bloomberg survey.

“We’ve bought into the rumor, which is something positive happening on the Italian front and an ECB rate cut,” said Harpreet Parhar, a strategist at Credit Agricole SA in London. “It’s going to be sell the fact.”

The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings also dropped for a seventh day, falling 19 basis points to 409. That’s the longest streak since September, when the measure fell for nine days.

The Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers fell seven basis points to 153 and the subordinated index declined 10 to 243.

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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