Corporate Bond Risk Premiums Uptick to Highest Levels in Japan

Default Premiums on the rise again

Feb. 18 (Bloomberg) — The cost of protecting investors in Japanese corporate bonds from default rose to a record on concern company failures will increase as the economy worsens.

The Markit iTraxx Japan index of credit-default swaps on the debt of 50 investment-grade borrowers rose 15 basis points to 585 at 9:50 a.m. in Tokyo, Barclays Capital prices show. The benchmark has jumped more than 200 basis points this month, double the rise on the Asia iTraxx index excluding Japan, according to CMA DataVision.

“People are increasingly risk averse,” said Fumihito Gotoh, head of Japan credit research with UBS AG in Tokyo. “They’re more concerned about cutting downside risk than timing the recovery.”

Japanese Finance Minister Shoichi Nakagawa resigned yesterday amid accusations he was drunk at a Group of Seven press conference, undermining confidence the government can tackle a recession that’s dragged the Nikkei 225 index down by 15 percent this year. Nakagawa’s departure came a day after the Cabinet Office reported the nation’s economy shrank at an annual rate of 12.7 percent last quarter, the most since the 1974 oil shock.

Taiwan’s economy probably shrank at the fastest pace on record last quarter as a slump in exports pushed the island into its first recession since the technology bubble burst in 2001. Gross domestic product plunged 6.82 percent from a year earlier, according to the median estimate of 18 economists surveyed by Bloomberg News. The statistics bureau publishes an economic report at 4.30 p.m. in Taipei today.

Benchmarks Climb

The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan rose 10 basis points to 445 at 9:10 a.m. in Hong Kong, according to ICAP Plc. The Markit iTraxx Australia index climbed 15 basis points to 360 at 11:42 a.m. in Sydney, Citigroup Inc. data show.

The Australian benchmark had been trading below 360 basis points since mid-December, according to CMA DataVision.

Credit-default swaps on the Markit CDX North America Investment-Grade index of 125 companies in the U.S. and Canada jumped 14 basis points to 213 yesterday, according to Barclays Capital. In Europe, The Markit iTraxx Crossover Index increased 17 basis points to 1,110, nearing the all-time high of 1,128 reached Dec. 16, according to JPMorgan Chase & Co.

Credit-default swap indexes are benchmarks for protecting bonds against default, and traders use them to speculate on changes in credit quality. The swaps pay the buyer face value in exchange for the underlying securities if a borrower fails to adhere to its debt agreements.

A basis point, or 0.01 percentage point, is worth $1,000 on a swap protecting $10 million of debt.