UPDATE: BP Bonds Rise And CDS Fall On Reports CEO Departing

(Updates with S&P equivalent rating in paragraph eleven) By Chris Dieterich Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--BP PLC's (BP.LN, BP)short-dated bonds rallied and the cost of protecting against a short-term default fell Monday to the lowest levels since June after reports that Tony Heyward will step down as chief executive of the troubled oil giant. Lower costs for one- and two-year contracts for insurance-like credit-default swaps flattened the credit swaps curve for BP, a sign that investors show less fear for BP's bankruptcy as clean-up efforts in the Gulf of Mexico show progress. The change "is a signal that BP is not going to disappear in the next year or two," said Thaddeus Strobach, a credit strategist at the Royal Bank of Scotland. In contrast to last month, few observers "even mention the B-word with BP," he said, referring to bankruptcy. The benchmark five-year credit swaps for BP improved only marginally after news that Heyward would step down, but the one-year and two-year contracts tightened by around 5.5% and 4%, respectively, according to data from Markit. Short-term credit-swaps contracts are less liquid, and therefore more volatile, than five-year contracts, so movements can sometime be exaggerated by a small number of trades, said Gavan Nolan, credit researcher at Markit. Still, the short-term swaps traded Monday at the cheapest levels in over two months. The cost to insure $10 million in debt issued by BP for one year traded at 383.75 basis points early Monday, or $383,750 million, the lowest since the June 9 close at 294 basis points. The two-year contract was 17.61 basis points improved to 367.5 basis points, the lowest since the June 9 close of 295.28 basis points. BP's more liquid five-year credit swaps traded 0.94 basis points tighter at 334.33 basis points as of 1:44 p.m. EDT. The five-year swaps spread has tightened around 40% since blowing out to 595 basis points on June 29. By one measure, Standard & Poor's Market Derived Signal, BP's swaps still trade at levels equivalent to a BB, or "junk" rating. Renewed confidence in BP's short-term outlook also appeared in the secondary market. Short-term bonds were the most active BP securities in Monday's client-dealer trading, according to MarketAxess. Trader demand for short-dated bonds pushed up prices and drove down yields. Prices move inversely to yields. BP's 3.125% notes due March 2012 gained nearly 11/16 points for a yield of 4.260%, while BP's 5.250% notes maturing in November 2013 gained 3/4 points to yield 5.148%. BP's credit-swaps curve steepened sharply in June and early July, inverting to a point where short-term contracts cost more then long-term contracts, a powerful sign that investors feared for the short-term solvency of the company. RBS' Strobach said that both BP's short-term and long-term bonds and swaps look attractive because the swaps curve is likely to continue to flatten. In light trading, BP's 8.25% notes due February 2022 last traded 3 points higher to yield 7.123%. BP's shares jumped in London and the U.S. Monday, with American depository shares up 4.45% to $38.50 as of 3:10 p.m. BP is scheduled to release earnings Tuesday. -By Chris Dieterich, Dow Jones Newswires; 212-416-2611; christopher.dieterich@dowjones.com -0- (MORE TO FOLLOW) Dow Jones Newswires July 26, 2010 16:14 ET (20:14 GMT)