Bloomberg News

Credit Markets Rally as Company Debt Risk Drops by Most in 2011

June 30, 2011

June 30 (Bloomberg) -- Credit markets are rallying as concern ebbs that Greece will default on its debt and investors speculate the selloff earlier this month was overdone.

Credit-default swap indexes linked to everything from high- yield corporate bonds to commercial-mortgage securities, which deteriorated to the worst levels since October earlier this month, have rebounded, according to Markit Group Ltd.

Investor appetite for risk improved this week as Greece’s creditors reach agreements on plans to help the indebted nation avoid default and lawmakers authorize the austerity plan required to keep rescue aid flowing. Economic data in the U.S., which indicated a weak patch earlier this month, showed more improvement in the housing market than forecast.

“The Greece situation is resolving in a way that’s been in the near term pretty positive for the markets,” New York-based Barclays Capital credit strategist Jeffrey Meli said in a telephone interview. “It’s been quite a rally,” he said.

The Markit CDX North America Investment Grade Index fell for a fourth day, declining 3.1 basis points to a mid-price of 91.8 basis points, the lowest since May 31, as of 4:48 p.m. in New York, according to index administrator Markit Group Ltd.

The index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, has dropped 9.3 basis points this week, on pace for the biggest decline since the five days ended July 9.

Subprime Derivatives

The credit swaps index, which typically falls as investor confidence improves and rises as it deteriorates, dropped 3.2 basis yesterday after the Greek parliament voted for an austerity plan. Lawmakers backed a bill today to authorize tax increases and asset sales. The swaps index is down from 101 basis points on June 24, the highest since Oct. 4.

Even as Labor Department figures showed jobless claims fell by less than estimated last week, concern eased that the U.S. economic recovery was slowing, after the number of contracts to buy previously owned U.S. homes rose almost three times as much as forecast as falling prices made properties more affordable.

Subprime-mortgage credit derivatives, which were the most- affected by the Federal Reserve’s auctions of home-loan bonds once owned by American International Group Inc. that helped roil broader credit markets, have been also bolstered by Bank of America Corp.’s offer announced yesterday to pay $8.5 billion to investors for faulty loans.

Mortgage Bonds

One Markit ABX index tied to subprime mortgage bonds that were rated AAA when issued in 2006 has climbed 12 percent this week after dropping more than 18 percent the previous 11 weeks. The index rose to 40.25 today from 35.9 on June 24, prices from London-based Markit Group Ltd. show. A similar index tied to junior AAA ranked commercial-mortgage bonds created in 2007, known as the Markit CMBX, has climbed to 69.3 from an almost nine-month low of 63.7 on June 27.

Prices on the indexes rise as investor confidence improves reflecting a decline in the cost of protecting against losses.

Bank of America, the biggest U.S. bank, moved to resolve bondholders claims over soured mortgages yesterday, reducing the uncertainty about future costs from defective mortgages in its Countrywide unit. The Charlotte, North Carolina-based bank previously said expenses tied to demands from bond buyers other than Fannie Mae and Freddie Mac could range from zero to as much as $7 billion to $10 billion.

“That was a big number they’re paying out obviously, but the uncertainty around that litigation had been a drag and it gives you a way of ballparking the potential cost across the system. The numbers look very manageable from the standpoint of a creditor,” Meli said.

Greek Optimism

Optimists view the developments in Greece as “one less reason to be bearish on the outlook” for the U.S., according to Andrew Wilkinson, senior market analyst at Interactive Brokers Group LLC in Greenwich, Connecticut.

“The fact that a meteoric plunge towards default has been staved off for three more months has equally encouraged some optimism that the world’s leading economy might soon pick-up,” he wrote in a note to clients today. “Risk aversion has consequently tapered off.”

Germany’s biggest banks and insurers and the government have agreed on a proposal to roll over Greek debt, Finance Minister Wolfgang Schaeuble said. Banks have agreed to roll over at least the Greek bonds they’re holding that mature through 2014, which amount to about 2 billion euros ($2.9 billion), Schaeuble said in Berlin today.

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.

--With assistance from Shannon D. Harrington in New York. Editors: Mitchell Martin, Pierre Paulden

To contact the reporters on this story: Mary Childs in New York at mchilds5@bloomberg.net; Jody Shenn in New York at jshenn@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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