Three weeks after European leaders hailed an “historic” agreement to restore confidence to the region’s banking system, rising gauges of stress in funding markets signal tensions will last at least through year-end.
The gap between three-month euro interbank borrowing and lending rates rose to the widest since March 2009 Thursday in the forward market, used to speculate on future interest rates, according to data compiled by Bloomberg. The cost for European banks to fund in dollars surged this month, with the three-month cross currency basis swaps falling to as much as 1.32 percentage points below the euro interbank offered rate, the most since December 2008.
“We are in the midst of the crisis,” Chiara Manenti, a fixed-income strategist at Intesa Sanpaolo Spa in Milan, said in a telephone interview. “The liquidity in the money market is not flowing normally between banks. Tensions in the funding markets will remain through year-end, and will be more pronounced in Europe.”
Traders are wagering the struggle of the region’s banks to obtain short-term funding will worsen as yields of Europe’s most indebted nations surge, heightening concern that Italy may follow Greece, Ireland and Portugal in needing a bailout. The gap between two-year German interest-rate swaps and similar- maturity government bond yields climbed to the most since November 2008.
Stress is building after European Union leaders agreed Oct. 27 to bolster lenders’ capital, increase the size of a regional stability fund and persuade bondholders to accept a 50 percent loss on Greek debt. The spread between Euribor, the rate at which European banks say they see each other lending in euros, and the average cost of their funding, priced to December reached 93 basis points yesterday, according to UBS AG data.
Shut out of the wholesale funding markets, banks in the region are becoming increasingly reliant on the European Central Bank as a lender of last resort. Spanish banks borrowings from the ECB rose 10 percent to 76 billion euros in October, the highest level in more than a year, while Italian firms reliance increased 6 percent to 111.3 billion euros.
Elsewhere in credit markets, the cost to protect U.S. corporate debt from default rose for the fourth day to the highest level in more than a month. General Mills Inc. sold $1 billion of notes as company bond issuance exceeded the 2011 average for the fourth consecutive week. The market for borrowing with short-term IOUs expanded the most in almost 10 months.
Plains Exploration Bonds
Bonds of Plains Exploration & Production Co. were the most actively traded U.S. corporate securities by dealers, with 151 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The Houston-based oil and gas company sold $1 billion of 6.75 percent notes due February 2022 on Nov. 16, Bloomberg data show. The notes rose from issuance at par to 100.125 cents on the dollar to yield 477.1 basis points more than similar- maturity Treasuries.
The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 2 basis points to a mid-price of 136.5 basis points in New York, according to data provider CMA. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 0.75 to 188. 25, according to JPMorgan Chase & Co. at 10:30 a.m. in London.
In the Asia-Pacific region, the Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan advanced 5 basis points to 215 basis points as of 8:05 a.m. in Singapore, Royal Bank of Scotland Group Plc prices show.
The indexes typically rise as investor confidence deteriorates and fall as it improves. Credit 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.
General Mills, the Minneapolis-based maker of Cheerios cereal and Yoplait yogurt, issued 3.15 percent notes due in December 2021 that yield 125 basis points more than similar- maturity Treasuries, Bloomberg data show.
Companies have sold $28.2 billion of bonds in the U.S. this week, surpassing the $23.2 billion weekly average this year, Bloomberg data show. Sales in the U.S. have climbed to $92 billion in November, the most since $158.9 billion was issued in May, Bloomberg data show.
Loan Prices Fall
The seasonally adjusted amount of U.S. commercial paper outstanding climbed $31.9 billion to $999.6 billion in the week ended Nov. 16, the Federal Reserve said yesterday on its website. That’s the biggest increase since a $71.5 billion rise in the period ended Jan. 26, and it followed a $12 billion drop in the prior period.
The Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index fell for the third day, declining 0.1 cent to 91.73 cents on the dollar. The measure, which tracks the 100 largest dollar- denominated first-lien leveraged loans, has declined from 92.25 on Oct. 28, the highest since August.
Leveraged loans and high-yield bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P.
In emerging markets, relative yields added 2 basis points to 415 basis points, or 4.15 percentage points, the widest since Oct. 13, according to JPMorgan Chase & Co.’s EMBI Global index as of 11:47 a.m. in Hong Kong. The measure has ranged from 259 on Jan. 5 to 496 on Oct. 4.
Bank Default Swaps
U.S. interest-rate swap spreads, a measure of stress in credit markets, rose yesterday to the highest level in more than two years. The difference between the two-year swap rate and the comparable-maturity Treasury note yield increased 1.06 basis points to 52.5 basis points, the most since June 8, 2009, Bloomberg data show. That’s up from 31 on Oct. 28.
Europe’s money-market rates are rising even after ECB President Mario Draghi unexpectedly cut its benchmark interest rate to 1.25 percent from 1.5 percent on Nov. 3.
The three-month Euribor rose on Nov. 16 for the first time since Oct. 28, and was fixed higher again today at 1.465 percent, according to the European Bankers Federation.
Credit-default swaps on the region’s banks from HSBC Holdings Plc to Italy’s Unicredit SpA soared to a record 300.8 basis points yesterday from 209.2 on Oct. 28, the day after the agreement, according to data from CMA.
Spanish government bond yields rose to a euro-lifetime high yesterday after the Treasury sold 3.56 billion euros ($4.79 billion) of a new January 2022 benchmark security, paying an average of 6.975 percent. France, rated AAA, sold 8.05 billion euros of debt, as 10-year yield gap with Germany widened past 2 percentage points for the first time since the common currency’s introduction.
“The stress in the interbank market is increasing,” said Alessandro Giansanti, a senior interest-rates strategist at ING Groep NV in Amsterdam in an interview on Nov. 16. “The widening of the French government yield spread is affecting French banks’ ability to receive money in the interbank market.”
The extra yield investors demand to hold 10-year bonds from France, Belgium and Austria instead of similar-maturity German bunds all increased to euro-era records this month, Bloomberg data show. Italy’s 10-year yield climbed above 7 percent this week as Prime Minister Mario Monti formed a cabinet for his so- called technocrat government.
“There are still funding problems within the European banking system,” said James Bianco, president of Bianco Research LLC in Chicago, said yesterday in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “There is still tremendous stress. The Spanish 10-year yield hit 7 percent. There are more losses among the banks that own that debt within Europe.”
U.S. money market firms have slashed their holdings of European bank securities leading to a drought in dollar funding in the region. Prime money market funds reduced holdings of securities issued by European banks by 14 percent in September, according to Fitch Ratings. The 10 largest U.S. funds with a combined $654 billion reduced European bank assets to 38 percent of holdings, the lowest level since at least 2006 when Fitch started compiling the survey.
Italian banks may be forced to increase their reliance on emergency funding from the ECB as their liquidity levels have fallen to levels not seen since January 2009 after the value of the government securities they held tumbled, the central bank wrote in its Financial Stability Report published on Nov. 3.
The ECB announced in October it would reintroduce year-long loans for the regions’ banks as the sovereign debt crisis threatens to lock local money markets. It had previously coordinated with the Federal Reserve to provide euro-area banks with dollars. The central bank offered 12-month loans last month and will off a 13-month loan in December.
“On paper EU politicians have solved this crisis many times over, but in reality they haven’t actually done enough and that’s what is keeping this from getting anywhere near a resolution,” said Otto Dichtl, a London-based credit analyst for financial companies at Knight Capital Europe Ltd. “It’s very discouraging and frustrating and just prolongs the uncertainty which is killing the market.”
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