Swaps Show Developing Nations Gaining on G-7: Credit Markets

The average cost of contracts protecting debt of the so- called BRICs dropped to 41.4 basis points more than the price of swaps on the Group of Seven countries and last week reached the lowest on record. The extra cost to insure the emerging-market nations' bonds shrunk from 362 basis points, or 3.62 percentage points, in March 2009.

Record demand for emerging-market bonds is driving down the relative yields that investors seek to own the debt. Fixed- income investors are wagering nations including Brazil and China will continue to fuel the global recovery while the U.S., Japan and some of Europe's biggest countries wrestle with budget deficits and sluggish growth. Developing nations will grow 6.4 percent next year, while developed economies will expand 2.2 percent, the International Monetary Fund said last week.

"Emerging markets don't have the problems that developed markets are having right now," said Mikhail Foux, a credit strategist at Citigroup Inc. in New York. "They don't have the heavy debt load. They're growing. A lot of them export commodities, and the price of commodities is increasing. Their populations are young and growing. So people feel really good about emerging markets in general."

The average cost of swaps on BRIC nations has fallen 9 basis points since the start of the year to 116 basis points, while the G-7 average jumped 15 to 74, according to data provider CMA. The G-7 average includes swaps on the U.S., U.K., France, Germany, Italy and Japan. Swaps on Canada are not actively traded.

Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of similar maturity government debt fell 1 basis point to 168 basis points, according to Bank of America Merrill Lynch's Global Broad Market Corporate Index. That's the lowest since reaching the same level May 13 and down 13 basis points since Aug. 31. Yields averaged 3.36 percent yesterday.

The cost of insuring Standard Chartered Plc debt from default fell to the lowest in two months on speculation its plan to raise about 3.3 billion pounds ($5.2 billion) of equity in a rights offer means the bank won't have to sell as many bonds to boost its capital.

Credit-default swaps on the lender fell 2.5 basis points to 78.5, according to data provider CMA, while its shares dropped 2.3 percent to 1,864.5 pence as of 11:20 a.m. in London.

Standard Chartered's 1.25 billion euros ($1.8 billion) of 3.625 percent senior unsecured notes due 2015 rose, pushing the yield versus benchmark government debt 7 basis points lower to 131, according to HSBC Holdings Plc prices on Bloomberg.

Investors in Standard Chartered will be offered one new share at 1,280 pence for every eight they already own, the London-based bank said in a statement today. That's a third less than yesterday's closing price. Temasek Holdings Pte, Standard Chartered's largest shareholder with a 17.7 percent stake, will subscribe to its portion of the sale, the bank said.

Credit-default swaps typically rise as investor confidence deteriorates and fall as it improves. Contracts 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.

Petroleos de Venezuela SA plans to sell $3 billion of bonds due in 2017 locally to help finance investment and government housing projects. The state oil company will provide sale details in a prospectus on Oct. 18, it said in an e-mailed statement. Investors will be allowed to buy the dollar- denominated notes with bolivars.

Venezuela, which sets two exchange rates for imports and a third rate that is determined by the central bank, is seeking to meet demand for dollars among companies and individuals after President Hugo Chavez closed the unregulated currency market in May. Chavez said Oct. 2 that half the proceeds of the PDVSA sale will help finance construction of low-income housing. The Caracas-based company sold $6.3 billion of bonds last year and $1.04 billion of debt in August.