Irish debt demand triggers decline in Sovereign default swaps
Ireland led a decline in the cost of insuring against losses on European bonds after a surge in demand at government debt auctions eased investor concerns that the region’s sovereign deficit crisis will worsen.
Credit-default swaps on Ireland dropped from a 17-month high, falling 30.5 basis points to 272.5, according to data provider CMA. That’s the biggest decline since June 9 and follows nine straight days of increases. Contracts on corporate derivative indexes fell from the highest levels in four weeks.
Investors bid for more than five times the amount of the 2014 securities offered in the Dublin auction that raised a total €1.5bn. Concern that slowing economic growth will exacerbate Europe’s deficit crisis prompted speculation that bond buyers would shun offerings from Ireland and Spain today.
“The success of the auctions is what’s driving the market,” said Suki Mann, a London-based credit strategist at Societe Generale SA. “There was concern they wouldn’t get their funding away, but obviously the markets’ concerns have been misplaced.”
Bidding for Ireland’s 2014 security compared with offers of more than three times in a May action, the National Treasury Management Agency in Dublin said today. Demand for a 2020 security fell to a bid-to-cover ratio of 2.4, against 3 in July. The yield premium investors demand to hold Irish 10-year bonds rather than benchmark German bunds declined.
Spain sold €4.34bn of 12-month bills today at an average yield of 1.836pc, compared with 2.221pc on July 20, and demand was 2.47 times the amount offered, up from 1.95 times last month.
Swaps on Spain dropped 14 basis points to 208.5, CMA prices show. Contracts on Portugal declined 12 basis points to 266.5, Italy fell 10.5 to 187 and Greece decreased 10 to 839.
The Markit iTraxx SovX Western Europe Index of swaps on 15 governments fell from the highest level in nearly six weeks, dropping 6 basis points to 135.5, CMA prices show.
The Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings decreased 20 basis points to 495, according to JPMorgan Chase & Co. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 4.75 basis points to 110.75, JPMorgan prices show.
The Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers fell 2.5 basis points to 129.5 and the subordinated index dropped 8 to 193.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A basis point on a contract protecting €10m of debt from default for five years is equivalent to €1,000 a year.