Credit Risk Rises for Fifth Week in Europe on Fed QE Withdrawal

The cost of insuring European company bonds against losses headed for a fifth weekly increase as the Federal Reserve confirmed it will slow asset purchases if the economy continues to strengthen.

The Markit iTraxx Europe Index of credit-default swaps on 125 companies with investment-grade ratings climbed 13 basis points to 123, the longest rising streak since the week ending Aug. 26, 2011, according to data compiled by Bloomberg. The average yield investors demand to hold European corporate bonds rose 15 basis points to a four-month high of 2.19 percent, Bank of America Merrill Lynch index data show.

Credit risk started increasing when Fed Chairman Ben S. Bernanke said on May 22 the central bank could taper stimulus if the U.S. employment outlook showed sustained improvement. It jumped again this week after he mapped out a timetable for withdrawal, saying the Fed will begin winding down $85 billion of monthly bond purchases this year and end them by the middle of 2014 if the economy continues to improve as forecast.

“The market has been addicted to liquidity injections through quantitative easing,” said Geraud Charpin, a fund manager at Bluebay Asset Management Ltd. in London which oversees $55 billion. “Just the mere thought of reducing the dose makes people feel a bit sick. We are seeing withdrawal symptoms.”

Bond Sales

Daimler AG, the world’s third-biggest maker of luxury cars, led 8.4 billion euros ($11 billion) of bond sales, the fifth week issuance has fallen below the weekly average of 15.2 billion euros, according to data compiled by Bloomberg.

In the new issue market today, Danone SA, owner of the Activia yogurt and Evian water brands, raised 500 million euros from 2.6 percent notes maturing in June 2023, according to a person familiar with the deal.

Oracle Corp., the largest maker of database software, has mandated banks to arrange meetings with investors in Europe starting June 25 for a potential sale of euro-denominated bonds, according to another person. It would be the Redwood City, California-based company’s first sale in the currency, Bloomberg data show.

The Markit iTraxx Crossover Index of default swaps on 50 high-yield companies also rose for a fifth week, climbing 45 basis points to 496, the biggest weekly increase since March 22. An increase signals deterioration in perceptions of credit quality.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers rose 20 basis points to 179, while the subordinated index climbed 35 basis points to 271.

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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