Bond: Bernanke testimony boosts riskier credit

20 Jul, 2006

Riskier parts of Europe's credit markets rallied on Wednesday afternoon, as comments from Federal Reserve Chairman Ben Bernanke boosted hopes of a pause in US interest rate rises, lifting stocks and government bonds.
The iTraxx Crossover index, made up mostly of "junk"-rated credit default swaps, tightened about 6 basis points from the day's open to be bid at 279 basis points, a trader in London said, while the iTraxx Europe index of 125 key investment-grade credits tightened marginally to be bid at 31.5 basis points.
Bernanke said he expected core US inflation to decline and the Fed was forecasting cooler economic growth and some moderation in inflation next year - although it remained worried about pricey oil and tight labour markets, and the risk that they might foster expectations for rising prices.
Bernanke's comments, in testimony prepared for delivery to the Senate Banking Committee, followed stronger-than-expected core US inflation figures for June. The comments sparked gains of about 1.5 percent on US equity indexes, and rallies in European and US government bonds.
"(The testimony) had a bit more of a dovish feel to it," suggesting that rates might not rise or that there would be a pause in the rate rise cycle, a second trader in London said. "If you look at the reaction of Bunds and Treasuries, which have really rocketed up, that also supports that view."
Hybrid bonds, which are higher-yielding and more risky than standard bonds because they blend features of equity and debt, lifted slightly, a third trader said, with spreads on corporate hybrid bonds narrowing 3 to 5 basis points.
Bernanke's comments that the Fed should take into account "the possible future effects of previous policy actions" were also viewed as bullish by credit market participants, by pointing to a potential pause in rate rises, the third trader said.
In telecoms, one of the market's biggest sectors, spreads on longer-dated bonds narrowed slightly, a telecoms trader said.
Deutsche Telekom's euro bond due 2033 was bid at 140 basis points over Bunds and France Telecom's 2033 bond was bid at 148 basis points over Bunds, both 1 basis point tighter, he said.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros paring earlier losses to yield an average 54.6 basis points more than similarly dated government bonds at 1506 GMT, 0.3 basis point more on the day.
The primary market was generally quiet, but French reinsurer Scor offered subordinated debt to help refinance its purchase of Revios Ruckversicherung AG.
SCOR sold 350 million euros of bonds at par with a coupon of 6.154 percent, giving a spread of 213.5 basis points over Bunds, lead manager BNP Paribas said.
The acquisition of Revios, the former life reinsurance unit of Gerling Global Re, makes Scor one of the world's top life reinsurers.

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