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Euro bond risk falls to new low

Euro bond risk falls to new low
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First Published: Thu, Feb 08 2007. 06 26 PM IST
Updated: Thu, Feb 08 2007. 06 26 PM IST
By Agencies
The risk of owning European bonds dropped for a third day to a record low, according to traders of credit-default swaps.
Investors buying contracts that protect company debt from default were buoyed by earnings reports. Unilever, the world’s second-largest maker of food and detergent, said profit more than doubled in the fourth quarter, and BT Group Plc, the U.K.’s biggest phone company, said third-quarter profit rose 13 percent.
Credit-default swaps based on 10 million euros ($13 million) of debt included in the iTraxx Crossover Index of 45 European companies fell to 185,000 euros from 185,500 euros, according to JPMorgan Chase & Co. A decline indicates the risk of default is falling.
“The key driver is the strong performance of the equity markets,” said Guy Stear, an analyst at Societe Generale in Paris. “Earnings have improved and U.S. economic data has been good.”
Worker productivity in America grew at the fastest rate in almost a year last quarter and labor costs rose at a slower pace, the Labor Department reported yesterday. Policymakers at the U.S. Federal Reserve said last week that inflation has slowed “modestly” even as growth in the world’s largest economy accelerates.
Credit-default swaps are financial instruments based on bonds or loans that are used to speculate on a company’s ability to repay debt.
Investors who buy the contracts pay a quarterly premium, typically for five years. In return they get 10 million euros should the company fail to adhere to debt agreements. The seller gets the defaulted notes.
Over Optimistic
The fall in the cost of credit-default swaps overstates optimism on the outlook for company earnings, amid signs that economic growth may be poised to slow, according to Mehernosh Engineer, a credit strategist at BNP Paribas SA in London.
“The Crossover is trading on fourth-quarter earnings at the moment, which is fine but it’s not forward looking,” said Engineer. “We don’t see any value in it at the minute.”
Manufacturing orders in Germany, Europe’s largest economy, fell 0.2 percent in December after foreign demand for consumer products such as refrigerators and television sets dropped, the nation’s Economy and Technology Ministry said Feb. 6. German business confidence fell from a record in January and European manufacturing growth slowed for a third month.
Profit Growth
Unilever credit-default swaps were little changed today after the company said net income increased to 2.03 billion euros from 684 million euros a year earlier.
The London- and Rotterdam-based company has boosted spending on advertising and research to fuel expansion at faster-growing units and catch up to rival Procter & Gamble Co., which has outpaced Unilever since 2001.
Credit-default swaps on London-based BT were also unchanged after the company said profit excluding a tax gain climbed to 465 million pounds ($916 million) from 411 million pounds, a year earlier. There is “high demand” for BT’s technology and network consulting services, Chief Executive Officer Ben Verwaayen said last month.
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First Published: Thu, Feb 08 2007. 06 26 PM IST
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