By Abigail Moses and Kate Haywood April 21 (Bloomberg) — Investors are paying record high rates to protect bonds of banks in Europe from default relative to the rest of the market as the region’s fiscal crisis deepens, while payments tied to the debt of U.S. financial companies soars on concern about tougher regulation. The Markit iTraxx Financial Index of credit-default swaps is about 20 basis points higher than the corporate Markit iTraxx Europe Index, according to JPMorgan Chase & Co. As recently as January, the relationship was reversed. Credit swaps on U.S. banks rose as investors speculated a Securities and Exchange Commission lawsuit against Goldman Sachs Group Inc. boosts chances of a legislative overhaul. The International Monetary Fund called Greece’s fiscal crisis a “wake-up call” on sovereign-debt risks as the country began talks on activating a 45 billion-euro ($61 billion) emergency aid package. Even after Goldman Sachs and Morgan Stanley reported earnings this week that beat analyst estimates, default risk climbed as a Senate panel approved derivatives legislation that would require lenders to spin off their swaps trading desks. “Tighter regulation certainly won’t help banks increase profits in the near term,” said Jeffrey Burch , co-head of global credit at Investec Asset Management in London, which manages more than $65 billion. Investors are also “reacting to the risk of spillover from Greece,” he said. Mortgage-Backed Securities Elsewhere in credit markets, Citigroup Inc. is attempting to sell $222.4 million of securities backed by new mortgages, the first transaction of its type in more than two years. Ford Motor Co. sold bonds tied to auto loans at a third of the relative yield it paid six months ago. U.S. 10-year interest-rate swap spreads turned positive for the first time in two weeks amid speculation the government may begin reducing the amount of debt it sells as the economy strengthens. Russia is scheduled to raise at least $4 billion in its first international bond sale since defaulting in 1998. Citigroup, which made the 255 loans in the past 11 months, is underwriting the potential sale with JPMorgan as co-manager, according to people familiar with the matter who declined to be identified because the sale is private. Redwood Trust Inc. , the Mill Valley, California-based real estate investment trust that specializes in jumbo-mortgage assets, is being called the securitization’s sponsor, which may mean it will buy more-junior classes, the people said. Issuance of home-loan bonds without government-backed guarantees peaked at almost $1.2 trillion in both 2005 and 2006 before freezing as the worst U.S. housing slump since the Great Depression sparked record plunges in their prices that weakened investors and curbed lending, according to the newsletter Inside MBS & ABS. Ford Offering Ford, the only U.S.-based automaker to decline a federal bailout, sold the largest portion of its $1.09 billion deal at a yield of 15 basis points more than benchmark interest rates, compared with 45 basis points in November, a person familiar with the matter said. The new issue is Ford’s first sale of bonds composed of auto loans since the Federal Reserve’s Term Asset Backed Securities Loan Facility concluded last month, though the Dearborn, Michigan-based automaker’s prior issue in November was held outside of TALF. Daimler AG, Bayerische Motoren Werke AG and Deere & Co. all sold similar debt last week, according to data compiled by Bloomberg. The difference between the rate to exchange fixed- for floating-interest payments for 10 years and similar-maturity Treasury notes, known as the swap spread, touched 0.13 basis point from negative 1.25 basis points yesterday. The spread was last positive on April 6, when it touched 3.25 basis points. A basis point is 0.01 percentage point. Emerging Markets In emerging markets, the extra yield investors demand to own bonds instead of Treasuries rose 6 basis points to 242 basis points, according to the JPMorgan Emerging Market Bond Index. Gramercy, a Greenwich, Connecticut-based investment fund, is “predisposed” to accept Argentina’s offer to restructure $20 billion in defaulted bonds held out of a 2005 settlement, Managing Partner Robert Koenigsberger said. “We are favorably predisposed to accept the offer, when it is officially launched, provided that market conditions are such that the value of the offer remains attractive,” Koenigsberger said in a statement e-mailed to Bloomberg News. Russia, Egypt Russia’s bond is driving borrowing costs to record lows for companies from OAO Gazprom to VTB Group , the nation’s second- biggest bank. The government plans to sell bonds due in 2015 at about 125 basis points more than similar-maturity U.S. Treasuries and 2020 notes at a premium of about 135 basis points, according to two people with knowledge of the deal. Egypt plans to raise $1.5 billion of bonds after adding a 30-year note to its first overseas sale of dollar debt in nine years, according to a banker involved in the transaction. The country may sell $1 billion of 10-year notes to yield about 5.875 percent and $500 million of 30-year bonds to yield about 7 percent, said the banker, who declined to be identified because terms aren’t set. Greek government officials joined with representatives of the European Union, IMF and European Central Bank in Athens to begin hammering out the deficit-cutting measures Europe’s most indebted nation will have to accept to be able to tap the funds. The iTraxx European financial gauge on 25 banks and insurers jumped 4.75 basis points today to 102.5, the highest in two months, while the corporate benchmark rose 2.75 to 83, JPMorgan prices show. An increase in the index signal deteriorating perceptions of credit quality. Spanish Banks Credit-default swaps on Spanish and Portuguese banks led the increase in financial debt risk in Europe, with contracts on Banco Commercial Portugues SA surging 25 basis points to 265, Banco Espirito Santo SA climbing 20 basis points to 269.5 and Banco Santander SA 12 basis points higher at 144, according to CMA DataVision prices. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a country fails to adhere to its debt commitments. A basis point on a contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year. Concern over Greece’s creditworthiness pushed the spread between the government’s 10-year bonds and benchmark German debt to 516 basis points, the highest in at least 12 years. Credit- default swaps tied to Greece’s debt jumped 19 basis points to a 488, a record close, CMA prices show. Talks in Athens Greece needs to raise 10 billion euros by the end of May, according to the debt management agency’s data. The country could activate the emergency aid package before the talks in Athens conclude in two weeks’ time, Finance Minister George Papaconstantinou said. Credit-default swaps on other European governments also soared as investors used the derivatives as a proxy for Greece as well as hedging against contagion. Contracts on Spain’s government debt climbed 15 to 160 basis points while Portugal advanced 31 to 232, CMA prices show. “Greece swaps are very illiquid, so some investors are looking to short other European sovereigns and financials as a way to manage that risk and hedge against losses,” said Peter Chatwell , a fixed-income strategist at Credit Agricole CIB in London. “If you can’t sell the asset you want to sell, you sell something that’s most closely correlated with it.” Goldman Sachs, JPMorgan Credit-default swaps on Goldman Sachs, the most profitable firm in Wall Street history, jumped 10 basis points to a two- month high of 134. Contracts on Morgan Stanley rose 7 basis points to 148.5, JPMorgan climbed 3 to 74 and Bank of America Corp. increased 11 to 137, according to CMA. Goldman Sachs, Morgan Stanley and JPMorgan are based in New York. The benchmark Markit CDX North America Index was little changed at about 88 basis points, according to index administrator Markit Group Ltd. Goldman Sachs reported April 20 that earnings jumped 91 percent to $3.46 billion, or $5.59 a share, compared with an average estimate of 23 analysts surveyed by Bloomberg for $4.14 per share. It was the bank’s second-most profitable quarter since it started releasing quarterly figures in 1997. Morgan Stanley said first-quarter net income was $1.78 billion, or 99 cents a share, beating the 57-cent average estimate of 24 analysts surveyed by Bloomberg. Morgan Stanley’s fixed-income results, the best since the third quarter of 2008, follow record revenue from debt trading reported earlier this month by JPMorgan, Goldman Sachs and Charlotte, North Carolina- based Bank of America. To contact the reporters on this story: Abigail Moses in London at Amoses5@bloomberg.net ; Kate Haywood in London at khaywood@bloomberg.net
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Banks Punished in Swaps as Gap to Industrial Bonds Soars: Credit Markets
