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Bank Swaps Led by Citigroup Drop Below Europe: Credit Markets
Dec. 8 (Bloomberg) -- U.S. bank bonds are about the safest on record relative to debt from European financial institutions as a growing economy allows Citigroup Inc. to wean itself off government support and a fiscal crisis roils Europe.
The average cost of protecting the notes of the six biggest U.S. banks including Citigroup and JPMorgan Chase & Co. against default fell to 12.16 basis points below the Markit iTraxx Financial Index of 25 European banks and insurers. Credit- default swaps on U.S. banks were 341 basis points higher than their European counterparts at the height of the credit crisis in October 2008.
Derivatives traders are penalizing firms in Europe for the bailout of Greece and Ireland while U.S. institutions are benefiting from perceptions the Federal Reserve will succeed in bolstering the economy and financial system. The Treasury Department sold the last of its stock holdings in New York-based Citigroup this week.
"The largest U.S. banks are outperforming European banks," said Rajeev Shah, a credit strategist at BNP Paribas in London. "The Citigroup unwind, although it does nothing to strengthen the capital structure, is a sentiment booster and should be viewed as positive for U.S. financials. European financials still have the peripheral concerns."
The U.S. has been winding down bank-bailout and emergency- lending programs introduced at the height of the subprime- mortgage crisis, making a profit of about $12 billion on the Citigroup deal for taxpayers. In Europe, traders are betting lenders will suffer losses on their government debt holdings as the region's budget deficit problems worsen.
Bond Spreads
Investors demand an extra 225 basis points, or 2.25 percentage points in yield to hold European bank bonds rather than government debt, the same as for U.S. banks, according to Bank of America Merrill Lynch indexes. The spread on U.S. bank notes was as much as 44 basis points wider than on their European counterparts in October.
Elsewhere in credit markets, the yield premium on company bonds worldwide fell 2 basis points to 173 basis points, after reaching a 12-week high of 177 on Nov. 30, Bank of America Merrill Lynch's Global Broad Market Corporate index shows. Yields averaged 3.87 percent.
Merck & Co. sold $2 billion of bonds in its first offering in more than 17 months. The second-largest U.S. drugmaker issued $850 million of 2.25 percent notes due in January 2016 that yield 57 basis points more than similar-maturity Treasuries and $1.15 billion of 3.875 percent debt maturing five years later at a spread of 77 basis points, according to data compiled by Bloomberg.
Merck Bonds
When Merck last sold bonds in June 2009, the Whitehouse Station, New Jersey-based company raised $4.25 billion in its largest offering ever, including $1 billion of 4 percent notes due June 2015 at a spread of 137.5 basis points over Treasuries, Bloomberg data show.
Goldman Sachs Group Inc. and Citigroup are marketing $876 million of bonds backed by commercial mortgages. The notes, set to be sold next week, are supported by 43 loans on 108 U.S. properties, including malls, shopping centers and office buildings, according to a person familiar with the offering who declined to be identified because terms aren't public.
Bonds from Fairfield, Connecticut-based General Electric Co. were the most actively traded U.S. corporate securities by dealers, with 140 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The Barclays Capital Global Aggregate Index of bonds has returned 0.43 percent this month, bringing this year's gain to 4.63 percent.
Galaxy Yuan Bond
Galaxy Entertainment Group Ltd., the casino operator part- owned by Permira Advisers LLP, is marketing a 1 billion yuan ($150 million) bond sale in Hong Kong to yield about 5 percent, according to a person close to the transaction, who asked not to be identified as the information is private. China is allowing greater use of its currency in global trade to reduce reliance on the dollar, and opened the yuan bond market in Hong Kong to overseas firms in February.
The Standard & Poor's/LSTA US Leveraged Loan 100 Index rose 0.13 cent to 91.87 cents on the dollar. Prices on the index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, have declined from 92.72 cents on Nov. 9, the highest since May 3.
Leveraged Loans
Leveraged loans and junk bonds are rated below Baa3 at Moody's Investors Service or less than BBB- at S&P.
AT&T Inc. is getting $8 billion of revolving credit lines to replace a larger existing borrowing facility. Dallas-based AT&T said in a regulatory filing that a group of banks committed to provide a $5 billion revolver due in four years and a 364-day $3 billion credit line to replace its $9.47 billion facility.
In emerging markets, the extra yield investors demand to own corporate bonds rather than government debt narrowed 17 basis points to 226 basis points, the lowest since December 2007, according to JPMorgan index data.
The cost of protecting U.S. corporate bonds from default fell for a fifth day.
The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 0.4 basis point to a mid-price of 90.25 basis points as of 5:26 p.m. in New York, according to index administrator Markit Group Ltd.
In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings declined 2.3 basis points to 104.875. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan rose 2 to 106.5 as of 8:36 a.m. in Singapore, Royal Bank of Scotland Group Plc prices show.
Investor Confidence
The indexes typically fall as investor confidence improves and rise as it deteriorates. 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.
The divergence in U.S. and European bank credit-default swaps mirrors the performance of each region's economies. Growth in the U.S. will likely be 2.5 percent next year, compared with 1.4 percent for the euro zone, according to the median estimate of economists surveyed by Bloomberg News.
The average cost of insuring Citigroup, JPMorgan, Bank of America Corp., Wells Fargo & Co., Morgan Stanley and Goldman Sachs dropped to 135.21 basis points from an 11-month high of 198 on June 10, according to CMA. That compares with 147.37 basis points for Markit's European financial index, which includes swaps on Barclays Plc and Deutsche Bank AG.
Bank Debt
U.S. bank debt is historically more expensive to insure against default than European firms. The basket of credit- default swaps on American lenders was 31 basis points higher than the Europe index as recently as Oct. 14, CMA prices show.
"The view in the marketplace is that the de-leveraging process is much further along in the U.S. financial system versus Europe," said Jason Quinn, co-head of U.S. high-grade trading at Barclays Capital in New York.
Moody's has raised the credit ratings of 37 investment- grade U.S. financial firms this quarter and cut 19, for an upgrade/downgrade ratio of 1.95, the highest since the three months ended Sept. 30, 2008, according to data compiled by Bloomberg. In Western Europe, Moody's has boosted 5 firms this quarter and lowered 16.
The U.S. is winding down bank-bailout and emergency-lending programs while trying to recoup the money it provided to bolster companies from automaker General Motors Co. to insurer American International Group Inc.
Citigroup Swaps
The Treasury still owns warrants on 465.1 million Citigroup shares, and the Federal Deposit Insurance Corp. holds $800 million of the bank's trust-preferred securities on behalf of the Treasury, according to a regulatory filing.
Citigroup may post an $11.7 billion profit this year, according to the average estimate of 16 analysts surveyed by Bloomberg, following two years of losses totaling $29 billion. Chief Executive Officer Vikram Pandit said yesterday in a memo to the bank's employees that "all the elements are in place" for sustained profitability at the third-largest U.S. lender.
Credit-default swaps on Citigroup debt fell to 142 basis points yesterday, the lowest level in more than a month and down from 238 in February, according to CMA.
Contracts on Bank of America dropped to 186.7 from a 17- month high of 220 on Nov. 30. Those on Goldman Sachs tumbled to 127 basis points from this year's peak of 228.5 in May, while JPMorgan fell to 81 from 134.6 on June 9, according to CMA. Swaps on Morgan Stanley plunged to 165.9 from 305.5 in June and Wells Fargo dropped to 108 from 140.4 in the same period.
Deficit Woes
As the U.S. recovers, Europe's deficit woes deepen. A crisis in the Irish banking system prompted the government to propose the most austere budget since World War II yesterday, a week after the nation followed Greece in seeking an international bailout.
European finance ministers ruled out immediate aid for Portugal and Spain or an increase in the 750 billion-euro ($994 billion) crisis fund, even as investors bet they'll be forced to bail out more nations.
"You have a much more uncertain outlook with the European countries," said Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc. in New York. That risk will "flow through" to the banking system, he said.
To contact the reporters on this story: Abigail Moses in London at Amoses5@bloomberg.net Mary Childs in New York at mchilds5@bloomberg.net
To contact the editors responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net Alan Goldstein at agoldstein5@bloomberg.net
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