Credit Risk Drops in Europe Amid Signs of U.S. Debt Limit Accord

The cost of insuring corporate bonds against losses fell for the first time in four days in Europe amid signs U.S. lawmakers will reach a deal for a short-term increase in the debt ceiling and avoid default.

The Markit iTraxx Europe Index of credit-default swaps on 125 companies with investment-grade ratings dropped 2.7 basis points to 99 basis points at 10:25 a.m. in London. The Markit iTraxx Crossover Index of 50 companies with mostly speculative-grade ratings fell 11 to 390, the lowest in almost a week.

Companies raised 11.8 billion euros ($16 billion) in the bond market this week as investors speculate corporate debt will offer a haven in the event of U.S. debt turmoil. Confidence a compromise can be reached is growing after aides of both parties, who spoke on condition of anonymity, said House Republican and Senate Democratic leaders are open to a short-term increase in the debt limit.

“A short-term agreement would only be a mildly constructive outcome, placing markets in limbo for several more weeks,” Jim Reid, a strategist at Deutsche Bank AG in London, wrote in a research note. “House Republicans haven’t yet decided how long an extension they would support and whether it will include any policy conditions.”

Company bond sales are approaching the 14.6 billion-euro weekly average for this year and are already 29 percent above last week’s total issuance, according to data compiled by Bloomberg.

In the new issue market today, Portuguese power company Redes Energeticas Nacionais SGPS SA is raising 400 million euros from seven-year bonds that will yield about 315 basis points more than swaps, according to a person familiar. The notes will be sold through REN Finance BV with a keepwell agreement from the Lisbon-based company.

Redes Energeticas Nacionais, rated one level below investment grade at BB+ by Standard & Poor’s, is selling the notes as investors seek higher-yielding securities. The average yield investors demand to hold junk-rated corporate debt has fallen 19 basis points this month to 4.6 percent, the lowest in eight weeks, Bloomberg bond index data show.

Also in the high-yield market, German building materials maker Xella International Holdings Sarl is marketing 200 million euros of payment-in-kind toggle notes yielding about 9.25 percent through its Xella Holdco Finance SA unit. PIK toggle notes give the borrower the option of paying coupons with cash or more debt.

Among high-grade borrowers, U.K. electricity supplier Western Power Distribution East Midlands Plc is selling 11-year benchmark-sized notes in pounds yielding 125 basis points to 130 basis points more than gilts.

Autobahnen- Und Schnellstrassen-Finanzierungs-AG, Austria’s motorway operator known as Asfinag, is selling 1 billion euros of seven-year securities guaranteed by Austria at a spread of six basis points more than swaps.

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