BLBG: Bond Risk Falls as Treasury Said to Invest in JPMorgan, Goldman
By Oliver Biggadike
Oct. 14 (Bloomberg) -- Default-protection costs on Japanese and Australian corporate bonds declined on anticipation the Bush administration will announce plans to invest in nine U.S. banks including JPMorgan Chase & Co. and Goldman Sachs Group Inc.
The program to rescue frozen credit markets includes spending about half of a total of $250 billion on stakes in nine major banks, according to people briefed on the matter. Japan's benchmark gauge of company bond risk fell the most since the contracts began trading in 2004, CMA Datavision prices show.
``Obviously this is positive, but just how positive remains to be seen,'' said Jason Rogers, a credit analyst with Barclays Bank Plc in Singapore. ``The markets are very cynical at the moment.''
The Markit iTraxx Japan index of credit-default swaps fell 45 basis points to 180 at 8:33 a.m. in Tokyo, according to prices from Morgan Stanley. The decline exceeds the 42-basis- point drop on March 21 after the rescue of Bear Stearns Cos., CMA data show. Japanese bond and equity markets were closed yesterday for a national holiday.
The iTraxx Australia declined 30 basis points to 185, Citigroup Inc. prices show. The benchmark, which declines as perceptions of credit quality improve, is tied to the debt of 25 companies, including Qantas Airways Ltd. and BHP Billiton Ltd.
The seven other U.S. banks in which the Treasury will take stakes are Citigroup Inc., Wells Fargo & Co., Bank of America Corp., Morgan Stanley, State Street Corp., and Bank of New York Mellon Corp., said the people. One of the people also said Merrill Lynch & Co. will receive an investment.
The indexes are benchmarks for protecting bonds against default and traders use them to speculate on changes in credit quality. A basis point, or 0.01 percentage point, is worth $1,000 on a swap that protects $10 million of debt from default.
Credit-default swaps pay the buyer face value in exchange for the underlying securities, or cash equivalent, if a borrower fails to adhere to its debt agreements.
To contact the reporter on this story: Oliver Biggadike in Tokyo at obiggadike@bloomberg.net.
