Credit Risk Climbs in Europe as U.S. Deadlock Threatens Default

The cost of insuring corporate bonds against losses in Europe rose by the most in more than a week as U.S. House Speaker John Boehner said the country may default if President Barack Obama doesn’t negotiate over the budget.

The Markit iTraxx Europe Index of credit-default swaps on 125 companies with investment-grade ratings climbed 2.1 basis points to 99 basis points at 11:31 a.m. in London, the biggest increase since Sept. 27. The Markit iTraxx Crossover Index of 50 companies with mostly speculative-grade ratings jumped 8.5 basis points to 395 basis points.

House Republicans will not back raising the government’s $16.7 trillion borrowing limit unless the Democrats agree to other provisions, Boehner said in a TV interview yesterday. Both sides have 10 days to end their standoff before the U.S. exhausts measures to avoid breaching the debt ceiling and risk defaulting on its payments, according to Treasury Secretary Jacob J. Lew.

“The markets have entered the week on the back foot with the U.S.’s ongoing fiscal impasse weighing on risk appetite,” Richard McGuire and Lyn Graham-Taylor, fixed-income strategists at Rabobank International in London, wrote in a note to clients. “Nevertheless, the continued modest nature of the risk off move associated with the fiscal impasse indicates the market remains broadly confident a solution will ultimately be found.”

Average yields on investment-grade bonds in euros rose 12 basis points last week to 2 percent, the highest since Sept. 18, Bloomberg bond index data show. Yields on junk-rated notes fell 10 basis points to a seven-week low of 4.7 percent.

Bond Debut

In the new issue market, bioMerieux, a French developer of tests for HIV and hepatitis, is debuting 300 million euros ($407 million) of seven-year notes to yield 3 percent to 3.25 percent, according to a person familiar with the matter.

Lloyds Banking Group Plc, the U.K.’s biggest mortgage lender, is selling as much as 1 billion euros of five-year bonds to yield about 65 basis points more than the mid-swap rate.

German building materials maker Xella International Holdings Sarl begins meeting investors in Europe today to market 200 million euros of five-year payment-in-kind toggle bonds. The securities, which may be rated B3 or six levels below investment grade by Moody’s Investors Service, will be issued through the company’s Xella Holdco Finance SA unit, the person said.

PIK toggle notes give the borrower the option of paying coupons with cash or more debt.

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