Volkswagen AG is selling Europe's first corporate bonds of thenew year as company borrowing costs relative to government debtfell to the lowest since April 2008.

The German carmaker was the region's biggest issuer of debt lastyear, selling 9.8 billion euros ($12.8 billion) of bonds, and ithas 6.5 billion euros of notes maturing this year, according todata compiled by Bloomberg.

The relative yield on European corporate bonds over governmentdebt has fallen to 137 basis points, according to Bank of AmericaMerrill Lynch's Euro Corporate index, compared with 301 basispoints at the start of 2012. The new issuance market has beendominated by banks so far this year and UniCredit SpA was in themarket today with a 1 billion-euro covered bond deal.

“Given the strength of the market, Volkswagen is kicking theball early and issuing with tight pricing,” said Geraud Charpin, afund manager at Bluebay Asset Management Ltd. in London, whichoversees $47 billion. “Autos are regular issuers so they have lotsto do over the year, and the market is favorable.”

Europe's biggest carmaker is offering 1 billion euros ofseven-year bonds that will be priced to yield 78 basis points morethan the mid-swap rate, according to people familiar with thetransaction. Marco Dalan, a spokesman for Volkswagen, said thefunds will be used to refinance existing borrowings.

In credit derivative markets, the cost of insuring European bankdebt fell to the lowest since April 2011 after central bankofficials agreed to delay a liquidity rule that could havestrangled interbank lending. Credit-default swaps linked toUniCredit and Societe Generale SA were the best-performing in theMarkit iTraxx Europe index linked to 125 investment-gradecompanies.

Lenders will be allowed to use an expanded range of assetsincluding some equities and securitized mortgage debt to meet theso-called liquidity coverage ratio, or LCR, after a deal was struckby regulators meeting in Basel, Switzerland yesterday.

UniCredit, Italy's biggest bank, is offering seven-year coveredbonds that will be priced to yield 150 basis points more thanswaps. It's the Milan-based bank's first covered bond transactionin euros since August, data compiled by Bloomberg show.

Default swaps on the lender dropped 14 basis points to 266 andcontracts on SocGen declined seven to 156, both the lowest sinceJuly 2011, according to data compiled by Bloomberg at 10:51 a.m. inLondon.

The Markit iTraxx Financial index linked to swaps of 25 banksand insurers dropped three basis points to 122.5, and is down from278 basis points at the start of last year. The Markit iTraxxEurope index was little changed at 104 basis points.

Abbey National Treasury Services Plc, a unit of Banco SantanderSA, is also selling bonds today due 2018, its first deal in eurossince February, according to data compiled by Bloomberg. Thebenchmark notes will be priced to yield 97 basis points more thanthe mid-swap rate, according to bankers.

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