Corporate Credit Risk Falls to Three-Year Low on Draghi Rate Cut

The cost of insuring against losses on corporate debt fell to the lowest in three years after European Central Bank President Mario Draghi cut the benchmark rate to a record 0.5 percent.

The Markit iTraxx Europe Index of credit-default swaps on 125 companies with investment-grade ratings dropped 3 basis points to 92, the lowest since May 2010. The decline follows the biggest monthly fall since January 2012.

Central bank purchases of government bonds to contain borrowing costs, coupled with cuts in benchmark rates to stimulate economic growth, have led investors to pour money into corporate bonds as they search for yield. Draghi said policy makers have an “open mind” about a negative deposit rate as they try to rescue the 17-nation euro area from recession, with the region’s economy forecast to shrink more than previously expected in 2013 by the European Commission today.

“The mini-correction we have been expecting since last week remains ever elusive,” Harpreet Parhar, a strategist at Credit Agricole SA in London, wrote in a note to investors. “It is the constant search for yield that continues to drive credit market direction, and yesterday’s rate cut maintains that support, and thus downward pressure on spreads.”

The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with high-yield credit ratings declined 10 basis points to a two-year low of 373 basis points. A decrease signals improvement in perceptions of credit quality.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers fell eight basis points to 131, and the subordinated index declined nine basis points to 216.

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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