The risk of U.S. companies defaulting on their debt rose for the fourth day on concern that the world's two biggest bond insurers will lose their top AAA ratings, trading in credit-default swaps shows.
The Markit CDX North America Investment-Grade Index, a benchmark gauge of default risk tied to the bonds of 125 companies, rose 3.25 basis points to a near-record 110.5 basis points, according to Deutsche Bank AG in New York.
The index has soared 13.25 basis points in the past four days as Moody's Investors Service and Standard & Poor's said they may cut the AAA rating of Ambac Financial Group Inc. (ABKFQ:US)'s bond insurer, the second-biggest. Fitch Ratings today downgraded Ambac's bond insurer, and Moody's yesterday said it may cut the rating of MBIA Inc., owner of the biggest bond insurer.
``You have a market that has zero confidence in anything financial right now,'' said John Giordano, a credit analyst at New York-based BlueMountain Capital Management, which manages $4.8 billion. ``You have the agencies who, in my opinion, have continued to make a comedy of errors. And you have very complex companies that are very hard to understand. It's easy for investors to just sit on the sidelines.''
Credit-default swaps tied to New York-based Ambac and Armonk, New York-based MBIA are trading at record highs. The bond-insurance industry guarantees $2.4 trillion in securities.
``Systemic risk is still very high,'' Gregory Peters, head of credit strategy at Morgan Stanley in New York, said in an interview today on Bloomberg Television. ``The concern now is counterparties, which throws into question the financial system.''
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality.
A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
Credit-default swaps tied to bonds from MBIA (MBI:US) have risen 10 percentage points the past two days to 26 percent upfront and 5 percent a year, according to CMA Datavision. That means it would cost $2.6 million initially and $500,000 a year to protect $10 million in MBIA bonds from default for five years.
Credit-default swaps on Ambac have risen 11.5 percentage points to 26.5 percent upfront and 5 percent a year yesterday, according to CMA Datavision in New York.
The Markit LCDX Series 9 index, a gauge of confidence in the U.S. high-yield, high-risk loan market that falls as sentiment worsens, dropped 0.4 point to 94.35, according to Goldman Sachs Group Inc.
In Europe, contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings increased 8 basis points to 450, JPMorgan Chase & Co. prices show. The Markit iTraxx Europe index of 125 companies with investment-grade ratings fell 1.25 basis point to 72.
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