Sovereign Bond Risk Climbs in Europe

Hits record as U.S. jobs report seen as sign economy is weakening.

European sovereign default risk rose to a record after a report showed employment in the U.S. unexpectedly stagnated in August, adding to signs the global economic recovery is weakening.

The Markit iTraxx SovX Western Europe Index of credit- default swaps insuring the debt of 15 governments rose 11 basis points to 310 at 1:40 p.m. in London, surpassing an all-time high closing price of 308 on Aug. 26. Swaps tied to Italian debt jumped 12 basis points to 397, topping last month’s record closing price of 391, according to CMA.

Payrolls were unchanged last month, the weakest reading since September 2010, after an 85,000 gain in July that was less than initially estimated, Labor Department data showed today in Washington. The median forecast in a Bloomberg News survey called for a rise of 65,000.

“Payrolls are always a roll of the dice,” Roger Francis, an analyst at Mizuho International Plc in London, said before the report. “The economy is still growing, but not at a pace that delivers upside for jobs.”

Italy’s 10-year bonds dropped for a 10th straight day, the longest run of declines since the euro’s 1999 debut. The difference in yield between Italian securities and benchmark German bunds widened to as much as 325 basis points, while the spread for Spanish notes increased to 307 basis points, both the widest since the European Central Bank started buying the nations’ debt on Aug. 8.

Spain, Ireland

Credit swaps on Spain rose 12 basis points to 386, while contracts on Ireland climbed 15 basis points to 792, CMA prices show.

Corporate credit in Europe was also hurt, with the Markit iTraxx Crossover Index of default swaps on 40 companies with mostly high-yield credit ratings rising 33 basis points to 687, according to JPMorgan Chase & Co. The Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers climbed 11 basis points to 246, signaling investors are less optimistic about credit quality.

A basis point on a credit-default swap protecting 10 million euros ($14.2 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.

Bloomberg News



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