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By Tim Catts and John Detrixhe June 9 (Bloomberg) — Microsoft Corp. ’s sale of $1.15 billion of convertible notes may help the market recover from a two-month slump. Sales of debt in the U.S. that can be exchanged for stock dropped 41 percent last month to $2.24 billion from this year’s peak of $3.79 billion in March, according to data compiled by Bloomberg. The three-year notes from the world’s biggest software maker, located in Redmond, Washington, don’t pay a coupon and can be handed over for shares if the stock rises 33 percent from the current market price, according to a statement distributed by PR Newswire today. Investors rocked by rising volatility stemming from Europe’s expanding government debt crisis may be attracted to the securities by Microsoft’s AAA credit rating, according to George Douglas , the chief investment officer of SSI Investment Management Inc. The company said it will use the proceeds to repay commercial paper, or debt due in nine months or less. “There’s a lot of demand for investment-grade convertible bonds,” said Douglas, whose Los Angeles-based firm manages $1.4 billion in assets. “Market sentiment has changed. You’re seeing a preference for higher quality, lower risk,” he said. Douglas said before the sale that he was “interested” in the Microsoft offering. Microsoft had $2.25 billion of short-term debt outstanding as of March 31, according to a filing with the U.S. Securities and Exchange Commission. The highest ranked dealer-placed commercial paper due in 30 days yields 0.31 percent, up from the low this year of 0.14 percent on Jan. 14, Bloomberg data show. ‘Low Cost’ The refinancing shows “they think short rates will be moving higher,” Douglas said. “It’s a very low cost source of funds for them, even if they don’t do anything particularly dynamic with it.” Elsewhere in credit markets, Altria Group Inc. sold $800 million of notes as the largest U.S. tobacco company prepares to repay bonds this month. Altria ’s 4.125 percent debt due in September 2015 were priced to yield 4.213 percent, or 225 basis points more than similar-maturity Treasuries, according to Bloomberg data. The Richmond, Virginia-based maker of Marlboro cigarettes may use proceeds from the sale to refinance debt or for working capital, according to a regulatory filing. The company has $775 million of 7.125 percent notes maturing June 22, Bloomberg data show. The debt, issued in December 2008, helped fund Altria’s acquisition of snuff maker UST Inc. in January 2009, which made Altria the nation’s biggest snuff producer. Default Risk Falls The cost of insuring against a default on European corporate bonds fell, snapping a two-day advance, with the Markit iTraxx Crossover Index of credit-default swaps on 50 mostly junk-rated companies dropping 16 basis points to 619 at 1:11 p.m. in London, Markit Group Ltd. prices show. The Markit iTraxx Financial Index of contracts on 25 European banks and insurers declined 6 basis points to 194, compared with the all-time closing high of 210 basis points set in March 2009, JPMorgan Chase & Co. prices show. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt. Lenders’ overnight deposits with the European Central Bank rose to a record yesterday as banks hoarded cash rather than lend it. Banks lodged 362 billion euros ($432 billion) in the ECB’s overnight deposit facility, up from 351 billion euros the previous day, the Frankfurt-based central bank said. That’s the most since the euro currency started in 1999. Bank of England Speculation the region’s government debt crisis will hurt company earnings prompted corporate bond holders to try to offload a record number of securities to the Bank of England under its debt purchase program yesterday. Investors tendered 507 million pounds ($730 million) of debt to the BOE, the most since it started the purchases in March 2009. The central bank offered to buy 384 million pounds of notes under its twice-weekly debt purchase program and ended up buying bonds with a face value of 94 million pounds. Bond sales in Europe continued to be dominated by financial companies and agencies today. Erste Abwicklungsanstalt, the German organization that’s winding down some of WestLB AG ’s holdings, plans to sell 500 million euros of three-year bonds, according to a person with knowledge of the sale. The proceeds will be used to fund the assets in Erste Abwicklungsanstalt, said the person, who declined to be identified because the details are private. WestLB moved 77 billion euros, or about a third of its assets, to the winding- down vehicle in April to help shrink its balance sheet . Swiss Re Swiss Reinsurance Co. , the world’s second-biggest reinsurer, raised 500 million Swiss francs ($435 million) from the sale of five-year bonds, according to data compiled by Bloomberg. The notes were priced to yield 80 basis points more than the benchmark swap rate, data show. Credit Suisse Group AG, UBS AG and Zuercher Kantonalbank managed the sale. Nordea Bank AB , the largest lender in the Nordic region, is selling 1 billion euros of floating-rate notes in its first benchmark issue of the debt this year. The three-year securities for the Stockholm-based bank will have a coupon of 75 basis points more than benchmark rates, according to two people with knowledge of the sale, who declined to be identified before terms are set. Nordea sold 500 million euros of three-year floaters in December at a spread of 45 basis points, according to data compiled by Bloomberg. U.S. Sentiment Sentiment in the U.S. improved yesterday, as seen in the difference between yields on two-year Treasuries and the rate to convert fixed payments to floating. The spread, a measure of bank risk, narrowed as much as 5.38 basis points yesterday to 41.25. “The absence of news has become news itself,” said Christian Cooper, a senior rates trader at Jefferies & Co. in New York. “We’re not out of the woods yet and we’ll certainly see some additional volatility, but not to the magnitude that we saw before.” S&P said it’s reviewing for downgrades the ratings of Transocean Inc., whose Deepwater Horizon rig exploded April 20 and triggered the biggest U.S. oil spill on record, and Anadarko Petroleum Corp., owner of a 25 percent stake in the BP Plc well that’s leaking into the Gulf of Mexico. Energy Companies S&P also said it cut the ratings on four oil and gas companies, citing the U.S. Department of the Interior’s extension of a six-month moratorium on drilling permits. S&P lowered Helix Energy Solutions Group Inc., Hornbeck Offshore Services Inc. and Hercules Offshore Inc. one step each. It cut ATP Oil & Gas Corp. two levels to CCC+. PHI Inc.’s rating will also be reviewed for a possible downgrade, S&P said. In emerging markets, the extra yield investors demand to own corporate debt instead of government securities narrowed 1 basis point to 338, according to JPMorgan’s EMBI+ Index. The index has risen from the low this year of 230 basis points on April 15. SACI Falabella SA’s consumer credit unit sold half of the amount planned in a bond sale in Colombia as the European debt crisis dries up demand for higher-yielding, emerging-market assets. CMR Falabella, a unit of Chile’s largest retailer by market value, sold 50.35 billion pesos ($25.7 million) of bonds. It planned to sell as much as 100 billion pesos of debt, according to an offer published June 4 in Bogota-based La Republica newspaper. Top-Rated Convertible Microsoft is the only issuer of convertible bonds to boast a top rating from Moody’s and A&P, allowing it to benefit from investors seeking to boost the average ratings of their funds. Convertible bonds are typically sold by companies that are unrated or graded below BBB-, the lowest investment grade. Besides Microsoft , the only other U.S. companies S&P ranks AAA, its highest rating and the same grade it assigns to U.S. government debt, are Exxon Mobil Corp., Johnson & Johnson and Automatic Data Processing Inc. Convertible bonds are debt securities with an option to exchange the notes for common shares at a premium to the market price. They pay lower interest than bonds that can’t be exchanged. They’re typically attractive when companies don’t expect a gain in their equities to trigger a swap, adding to outstanding stock and cutting the stake of existing shareowners. Microsoft declined 18 cents to $25.11 yesterday in Nasdaq Stock Market composite trading. It traded at $25.01 on May 26, the lowest since October. Hedge Funds Hedge funds typically invest in convertible bonds and then short the stock, seeking to profit from price differences between the securities. Shorting involves selling a borrowed security to profit if the price falls. Convertible bonds have fallen 2.4 percent this month after losing 4.5 percent in May, according to Bank of America Merrill Lynch index data. They have returned 0.29 percent this year, compared with a 5.6 percent loss for the S&P 500 stock index and a 4 percent gain for bonds globally. “There’s been a lot of demand relative to the modest supply coming through,” said Venu Krishna , a Barclays Capital analyst, said in a telephone interview. “It makes sense for issuers to come to the market when volatility is up and credit spreads are wider.” The VIX, as the Chicago Board Options Exchange Volatility Index is known, fell 2.87 points to 33.7. The index, which measures the cost of using options as insurance against losses in the S&P 500 index, has risen from 22.05 on April 30 and averaged 21.7 points in 2009. To contact the reporters on this story: Tim Catts in New York at tcatts1@bloomberg.net ; John Detrixhe in New York at jdetrixhe1@bloomberg.net