Bloomberg News

U.S. Company Risk Measure Jumps as Europe Evokes ‘08 Comparison

September 06, 2011

Sept. 6 (Bloomberg) -- A benchmark gauge of U.S. corporate credit risk climbed on concern that Europe’s fiscal imbalances will hurt U.S. debt markets, as bankers cite parallels to the 2008 financial crisis.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 5.4 basis points from Sept. 2 to a mid-price of 126.4 as of 4:52 p.m. in New York, according to index administrator Markit Group Ltd. The measure is at the highest closing price since reaching a more than one-year high of 126.8 on Aug. 22.

The index has increased from 95.8 basis points on Aug. 1 as investor concerns have mounted about the faltering U.S. economic recovery and upheaval in Europe’s government bond markets. The gauge typically rises as investor confidence deteriorates and falls as it improves. Deutsche Bank AG Chief Executive Officer Josef Ackermann said yesterday at a conference in Frankfurt organized by Euroforum that conditions in the stock and bond markets are reminiscent of three years ago.

“It’s a very gloomy market environment right now,” said Rizwan Hussain, a credit strategist at Morgan Stanley in New York. “An ‘08 type of comparison clearly does not bode well.’’

The collapse of Lehman Brothers Holdings Inc. in September of 2008 froze credit markets and forced taxpayer-funded bailouts of banks.

BofA Swaps Climb

Credit-default swaps on Charlotte, North Carolina-based Bank of America Corp. climbed 26.1 basis points from Sept. 2 to 352.9 basis points, according to data provider CMA, as the largest U.S. lender’s bid to resolve mortgage liabilities with an $8.5 billion settlement faces drawn-out litigation and may require a bigger payout as investors and regulators scrutinize the deal.

The Federal Housing Finance Agency, the regulator of mortgage-finance companies Fannie Mae and Freddie Mac, sued 17 banks, including Bank of America, to recover losses on mortgage- backed securities sold to Fannie Mae and Freddie Mac. The agency sued Countrywide separately in state court in Manhattan over transactions covered in the Bank of America settlement.

U.S. markets were closed yesterday for the Labor Day public holiday. 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: John Parry, Pierre Paulden

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

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


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