Corporate Default Swap Benchmarks Roll Into New Series in Europe

The latest series of indexes measuring the cost of insuring corporate debt against default started trading today as bond markets weakened after the Federal Reserve signaled a faster timetable for raising interest rates.

The Markit iTraxx Europe Crossover Index was expanded to include credit-default swaps on 60 companies with mostly high-yield credit ratings from 50 in the previous version as European benchmarks rolled into their 21st series. The new measure cost 321 basis points at 1:15 p.m. in London, according to data compiled by Bloomberg. That compares with 252 basis points for Series 20 at the close yesterday.

The cost for debt protection is being increased both by the addition of riskier companies to the benchmark and by concern that benchmark rates will rise from near record lows. Money market rates show traders see a 62 percent chance of an interest-rate increase by June 2015, up from 57 percent two days ago, after Janet Yellen said they could start rising “around six months” after the Fed stops buying bonds.

“Our positive view on credit in 2014, particularly for the second half has been based on a much slower withdrawal of liquidity than that currently implied by the Fed,” Jim Reid, a strategist at Deutsche Bank AG in London, wrote in a note to investors today. “We have to seriously think about whether to get more defensive on the asset class or whether to agree with the Fed that growth will come back strongly and take the view that this will trump all liquidity concerns.”

Yields Surge

Royal Bank of Scotland Group Plc, Royal Bank of Canada and Santander Consumer Finance are among financial companies marketing bonds today. Gatwick Funding Ltd. and Abengoa Finance are also planning to issue debt.

Elsewhere in Europe’s credit markets, government bonds slid, with Germany’s 10-year yield jumping five basis points, or 0.05 percentage point, to 1.65 percent, the biggest increase in yields since Feb. 28. Britain’s 10-year yield rose seven basis points to 2.77 percent. The rate on similar-maturity Treasuries was little changed at 2.78 percent after increasing 10 basis points yesterday.

The new version of the Markit iTraxx Europe index linked to 125 companies with investment-grade ratings was at 82 basis points, compared with 71 for the previous gauge yesterday. The Markit iTraxx Financial Index of swaps on the senior debt of 25 banks and insurers was at 101, after closing at 87, and the subordinated index was 154 basis points, up from 130.

No Roll

Five constituents changed in Europe’s investment-grade benchmark and one in the financial measure. Five companies were removed from the high-yield gauge and 15 were added. Markit iTraxx Europe HiVol Index did not roll because of low trading activity, according to Markit Group Ltd.

New benchmarks are created every six months when companies are added or dropped depending on their ratings, cost of protection and ease of trading.

A basis point on a credit-default swap protecting 10 million euros ($13.8 million) 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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