Credit Risk Surges From Three-Year Low on Slowing Growth Concern

The cost of insuring European corporate debt rose from a three-year low as disappointing Chinese manufacturing data triggered concern global economic growth will slow.

The Markit iTraxx Europe Index of credit-default swaps on 125 companies with investment-grade ratings rose seven basis points, or eight percent, to 94 basis points at 9:30 a.m. in London, the biggest increase in more than nine months.

Manufacturing in China unexpectedly fell for the first time in seven months, according to a report from HSBC Holdings Plc and Markit Economics. Federal Reserve Chairman Ben S. Bernanke said yesterday that a premature end to stimulus could endanger the U.S. economic recovery.

“It’s a combination of the Chinese PMI data and Bernanke’s statement yesterday,” said Juan Esteban Valencia, a strategist at Societe Generale SA in Paris. “Stocks are lower and these indexes are taking a cue from equities thus heading wider. After a sustained period of risk-on we’re having a risk-off day.”

In the corporate bond market, U.K. tour operator Thomas Cook Group Plc is marketing a sale of 525 million euros ($677 million) of seven-year bonds as part of a package to refinance the equivalent of $2.4 billion of debt. The notes are expected to yield 7.625 percent to 7.875 percent, according to a person familiar with the transaction.

Betting Shops

William Hill Plc, a U.K. operator of more than 2,300 betting shops, is meeting bond investors starting May 28 for a potential sale of pound-denominated securities, a person familiar with the plan said. The company, which last sold debt in 2009, hired Barclays Plc, Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc to arrange the meetings.

The average yield investors demand to hold euro-denominated corporate bonds fell to 1.74 percent, holding near the record 1.72 percent reached on May 17, while sterling bonds yield 3.45 percent on average, up from a low of 3.34 percent on May 2, Bank of America Merrill Lynch indexes show.

The Markit iTraxx Crossover Index of default swaps on 50 companies with high-yield credit ratings jumped 25.5 basis points to 392, the highest in a week and the biggest rise since March 20. An increase signals deterioration in perceptions of credit quality.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers rose eight basis points to 134, and the subordinated index climbed 13 basis points to 190.

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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