Corporate Bond Risk Falls in Europe on Prospect of Fed Rate Cut

The risk of European companies defaulting on their debt fell for a fourth day on speculation the Federal Reserve will cut benchmark lending rates next month, according to traders of credit-default swaps.

Contracts on the Markit iTraxx Crossover Index of 50 European companies with mostly high-risk, high-yield credit ratings dropped 5 basis points to 361 basis points, according to Deutsche Bank AG. The index, a benchmark for the cost of protecting bonds against default, falls when perceptions of credit quality improve.

Fed Vice Chairman Donald Kohn said yesterday that market ``turbulence'' sparked by the U.S. housing recession may reduce credit to businesses and consumers, reinforcing investors' expectations policymakers will cut rates again when they meet Dec. 11. Federal funds futures indicate a 100 percent probability of a reduction by a quarter point to 4.25 percent.

``The Fed might be forced not only to a couple of rate cuts, but to move toward a full rate-cut cycle,'' said Philip Gisdakis, a credit strategist at UniCredit SpA in Munich. ``Every piece of bad news is seen as good news for credit as it would force the Fed to lower rates.''
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