J.P. Morgan's European Credit Approach

April 01, 2000

J.P. Morgan Securities Ltd. launched an index for European credit default swaps, known as the ECSI, on March 1.

Morgan argues that this derivative product gives a better picture of the risks of credit and frees credit buyers from bond market conditions, which don't necessarily track company credit risk. Bond yields are strongly influenced by liquidity in the swap market, said Peter Rappoport, head of global portfolio research at J.P. Morgan.

"The market in corporate bonds hasn't really arrived," he added. Issuance of European corporate bonds is massively larger than three or four years ago, but corporate bonds aren't as diverse as stocks, geographically or by industrial sector, he said. Whereas analysts had predicted that banks would be forced to bring European corporates to the bond market in large numbers, "banks tended to securitize their loan portfolios rather than shrink their loan books and bring issuers to market," he said.

The index will also be quoted as a credit-linked note, a notional bond with the yield of the whole index.

For a fuller discussion see the article on p. 31.

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