Credit Risk Heading for Biggest Monthly Drop Since January 2012

The cost of insuring against losses on corporate and financial debt is heading for its biggest monthly fall since January 2012.

The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with high-yield credit ratings declined to a two-year low of 397.5 basis points from 486 at the end of last month. NXP Semiconductor NV and TUI Travel Plc were among companies whose contracts fell to the lowest since before the start of the financial crisis in 2007.

Bond risk has been declining since the ECB pledged to do whatever it takes to protect the euro last July and economists forecast the European Central Bank will cut its benchmark rate to 0.50 percent on Thursday from 0.75 percent. Stocks around the world also rose to the highest in almost five years as Spain’s economic slump eased and euro-area inflation slowed.

“There seems to be a fair amount of indiscriminate buying in a desperation to get invested -- it’s insatiable,” said Simon Ballard, a senior credit strategist at National Australia Bank in London. “People are looking at the corporate space as the new risk-free asset.”

Swaps on Eindhoven, Netherlands-based NXP fell for a sixth day, falling two basis points to 282, the lowest since February 2007. TUI in Hannover dropped as much as 18 basis points today to 315, the lowest since July 2007.

Europe Gauge

The Markit iTraxx Europe Index of credit-default swaps linked to 125 companies with investment-grade ratings dropped to a two-year low of 99 basis points from 126 on March 29. A decrease signals improvement in perceptions of credit quality; an increase, the opposite. That measure was one basis point lower today, while the high-yield index was down nine.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers fell seven basis points today to 146, and was 194 at the end of last month. The subordinated index declined nine basis points to 235.5, compared with 312 last month. Both are poised for the first monthly slide since January.

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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