Bank debt is the safest relative to corporate bonds in almost 16 months amid confidence Europe’s political leaders will step up efforts to end the region’s crisis when they meet this week.
The Markit iTraxx Financial Index of credit-default swaps on the senior debt of 25 European banks and insurers fell for a fifth day and now exceeds a broader measure of 125 investment- grade companies by 49 basis points, compared with 120 basis points in July. The European Financial Stability Facility, the region’s temporary bailout fund, is selling 5.9 billion euros ($7.7 billion) of five-year bonds in its biggest deal since July.
Investors are growing more confident banks will ride out the crisis that started in Greece nearly three years ago after the European Central Bank unveiled a bond buying plan last month. Greek Prime Minister Antonis Samaras will pitch for an additional two years to meet budget-deficit targets at the meeting with his European Union counterparts as Spanish Prime Minister Mariano Rajoy delays asking for a bailout.
“Financials have outperformed on the basis of liquidity injections and being ring fenced from peripheral risk by the rhetoric if not the actions of the ECB,” said Simon Ballard, a senior credit strategist at National Australia Bank in London. “The macro picture in terms of growth is still anemic.”
The financial index fell six basis points to 170 at 4 p.m. in London, while the Markit iTraxx Europe Index of 125 companies with investment-grade ratings dropped five basis points to 122. The difference between the gauges peaked at 150 basis points in November.
Investors should sell default protection on the corporate index and buy the financial measure, according to Pierre-Yves Bretonniere, a strategist at BNP Paribas SA in London.
Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings dropped 23 basis points to 509. A decline signals improvement in perceptions of credit quality.
A basis point on a credit-default swap protecting 10 million euros 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.
The EFSF bonds will be priced at 23 basis points more than the benchmark mid-swap rate, according to a person with knowledge of the deal. The notes were initially marketed with a spread of 25 basis points.
Numericable Finance & Co. is also selling 410 million euros of bonds, according to a person familiar with the offering, who asked not to be identified because terms aren’t set. Speculation the Luxembourg-based cable operator is set to merge with Vivendi SA’s SFR mobile phone unit is credible, Bank of America Corp. analysts said yesterday.
Solihull, England-based Paragon Group of Companies Plc is offering 175 million pounds ($282 million) of top rated bonds backed by buy-to-let mortgages, according to a banker with direct knowledge of the deal.
Sales of sub-prime mortgage backed debt are increasing, with Investec Plc pricing 150 million pounds of the securities last month.