Ireland's CDS blowout default looms

Irelands bankruptcy is getting closer.

LONDON (Dow Jones)--Spreads on European corporate credit-default swap indexes were mixed Tuesday, as credit underperformed equities thanks to renewed worries about peripheral euro-zone countries that pushed the benchmark sovereign index wider.

Shortly after 1420 GMT, the Markit iTraxx Crossover index, which allows investors to buy or sell default protection on a basket of 50 mostly sub-investment grade European corporate borrowers, was one basis points tighter from Monday's close, at 453/457 basis points.

The Europe index of 125 high-grade borrowers, by contrast, was 0.75 basis points wider at 98.25/99.25 basis points, and the SovX Western Europe index of 15 sovereigns was four basis points wider at 161.1/162.5 basis points.

Weakness in the sovereign credit market often has more of an impact on the Europe index than the Crossover index, because Europe includes banks that are highly sensitive to sovereign instability.

The SovX index was led wider by its peripheral euro-zone sovereign constituents--those with a weaker fiscal position and/or credit rating. Ireland's five-year sovereign credit default swaps hit a fresh high of 525 basis points, up around 25 basis points from Monday's close, and Greece, Spain, and Portugal were also wider.

"Ireland is consistently above 500 basis points, and we're seeing some selling activity in bank bonds on the back of the sovereign move," said a trader, adding that the continuing peripheral weakness reflected moves by European Union leaders at last week's summit to set up a permanent mechanism for confronting a fiscal crisis in the euro-zone.

"Technically, you can argue that setting up some kind of sovereign restructuring process is the right thing to do, but to go public when markets are so fragile is madness," said Gary Jenkins, head of fixed-income research at Evolution Securities in London.

As well as moves in the sovereign market, credit investors are waiting the U.S. mid-term elections Tuesday and the FOMC meeting later Wednesday.

"Yesterday's [better-than-expected] ISM data probably increases the probability of a flexible and incremental approach from the Fed tomorrow that may slightly disappoint those hungry for the full liquidity commitment immediately," said Jim Reid, credit strategist at Deutsche Bank, in a note.

and

LONDON -(Dow Jones)- The Irish five-year credit default swap spread widened to a new record level Tuesday, according to data provider Markit.

The five-year credit default swap spread on Ireland was 27 basis points wider at 525 basis points, according to Markit. This means it now costs an average of $525,000 a year to insure $10 million of debt issued by the company.

CDS are tradable, over-the-counter derivatives that function like a default insurance contract for debt. If a borrower defaults, the protection buyer is paid compensation by the protection seller. Swap buyers may be protecting investments they own or simply making bearish bets against countries.