Bloomberg News

U.S. Credit-Default Swaps Benchmark Eases After Four-Day Climb

June 07, 2011

June 7 (Bloomberg) -- The cost of protecting U.S. corporate bonds from default eased after jumping as much as 6.6 basis points in the previous four days.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 0.4 basis point to a mid- price of 95.6 basis points as of 5:09 p.m. in New York, according to index administrator Markit Group Ltd. Credit- default swaps on International Paper Co. reversed almost half of yesterday’s jump after the world’s largest pulp-and-paper maker made a hostile takeover bid for Temple-Inland Inc.

“It’s a little bit of a break,” said Brian Reynolds, chief market strategist at WJB Capital Group Inc., which is based in New York. “When markets go strongly in one direction, they take a little bit of a pause.”

The credit swaps index, which typically falls as investor confidence improves and rises as it deteriorates, ended yesterday at the highest level since March 29. Labor Department figures on June 3 showed employers in May added the fewest number of workers in eight months, and the jobless rate climbed to 9.1 percent, the highest this year.

This month brings the scheduled end of the Federal Reserve’s second round of bond purchases, known as quantitative easing or QE2. The Fed has bought $75 billion of Treasuries a month since November, and investors are concerned the program’s end will disrupt financial markets, according to Reynolds.

‘Multi-Month Correction’

“The big fears in the U.S. are over the end of QE2,” he said. “It’s not a big deal in the long run, but because there’s so much fear about it, it can cause a multi-month correction just like last year.”

The index declined this morning after European Central Bank President Jean-Claude Trichet signaled he may back Greek debt rollovers. While Trichet is against imposing losses on creditors, the ECB isn’t opposed to asking them to “maintain their level of outstanding credit,” he said in Montreal yesterday, the first sign he endorses measures to encourage investors to buy new Greek debt to replace maturing securities.

Under a plan being discussed by European officials, investors may get preferred status, higher coupon payments or collateral to entice them to roll over their holdings when they mature, two separate officials, who declined to be identified because the talks are in progress, said last week.

The cost to protect debt issued by International Paper eased 7.8 basis points to 135.3 basis points after jumping 17.9 basis points yesterday, according to data provider CMA.

Extended Decline

Credit-default swaps linked to Temple-Inland extended their decline, decreasing 6.3 basis points to 116.3, the lowest since Jan. 6, 2010, the data show. Yesterday the contracts fell 31.7 basis points, the biggest drop since April 2009, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Memphis, Tennessee-based International Paper’s $3.31 billion hostile takeover bid for Temple-Inland would increase its share of the North American market for containerboard used in shipping boxes. Temple-Inland, based in Austin, Texas, rejected the bid and adopted a poison-pill takeover defense. The offer is 46 percent more than Temple-Inland’s closing share price yesterday.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

--Editors: Richard Bedard, Sharon L. Lynch

To contact the reporter on this story: Mary Childs in New York at

To contact the editor responsible for this story: Alan Goldstein at

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