Corporate Credit Risk Drops to Three-Year Low as RBA Fuels Rally

The cost of insuring European corporate debt fell to the lowest in three years as credit markets rallied after the Reserve Bank of Australia followed the European Central Bank in cutting interest rates.

The Markit iTraxx Europe Index of credit-default swaps on 125 companies with investment-grade ratings dropped three basis points to 89, the lowest since May 2010, at 12:40 p.m. in London.

The RBA cut its benchmark rate to a record low of 2.75 percent today to bolster an economy that’s been weakened by the strong Aussie dollar. After the ECB cut its benchmark rate to an all-time low last week, President Mario Draghi said yesterday that further interest-rate cuts are possible. The latest stimulus compounds a global credit rally fueled last month by the Bank of Japan’s plan to buy more than 7 trillion yen ($70.6 billion) of bonds a month.

“Rate cuts from the ECB and now the RBA point to a continuation of flows into credit for now, and many investors holding short index positions have been forced to capitulate, keeping spreads grinding tighter,” said Joseph Faith, a credit strategist at Citigroup Inc. in London. “Despite deteriorating economic fundamentals in Europe, the Bank of Japan’s massive asset purchase plan is adding liquidity to the market whilst restricting the supply of other assets to buy.”

Hutchison Whampoa Ltd. plans to sell euro-denominated hybrid bonds in its first issue of securities in the currency in a year, according to a person familiar with the deal.

Bond Yield

The notes for the Hong Kong-based company controlled by billionaire Li Ka-shing combine features of debt and equity and will be callable after five years. They will be issued through Hutchison Whampoa Europe Finance (13) Ltd. and may be priced to yield about 4 percent.

Volvo AB, the world’s second-largest truck maker, is selling 300 million euros ($392 million) of three-year floating-rate notes, its biggest sale of bonds in the currency since November 2012, according to Bloomberg data. The securities will be priced to yield 80 basis points more than three-month Euribor, according to a person familiar with the deal.

BNP Paribas SA, the largest French bank, sold 300 million pounds ($466 million) of three-year floating-rate notes at 60 basis points more than three-month Libor.

Portucel Deal

Portucel-Empresa Produtora de Pasta & Papel SA will hold a call with investors tomorrow ahead of a private bond issue, according to a person familiar with the arrangement. Portugal’s biggest paper company wants to raise 250 million euros from a sale of senior notes maturing in 2020, it said in a statement today.

The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with high-yield credit ratings declined eight basis points to 370 basis points, the lowest since May 2011. A decrease signals improvement in perceptions of credit quality.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers fell two basis points to 129, and the subordinated index declined five basis points to 209.

A basis point on a credit-default swap protecting 10 million euros 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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