Bloomberg News

U.S. Credit Swaps Reverse Gains on Report EU Seeking Bank Rescue

October 04, 2011

Oct. 4 (Bloomberg) -- The cost to protect the debt of Morgan Stanley and U.S. companies reversed earlier increases after a report that European Union officials were examining ways to coordinate the recapitalization of struggling banks.

Credit-default swaps on Morgan Stanley, the New York-based owner of the world’s largest retail brokerage, fell 23 basis points to 560 basis points as of 4:23 p.m. in New York, according to broker Phoenix Partners Group. The contracts earlier traded as high as 650 basis points, the most since October 2008 in the month after Lehman Brothers Holdings Inc. filed for bankruptcy.

Investor confidence in the creditworthiness of banks and companies improved after the Financial Times quoted Olli Rehn, European commissioner for economic affairs, saying there is an “increasingly shared view” that the region needs a coordinated approach to halt the sovereign debt crisis. The cost to protect the debt has climbed amid concern that Europe’s fiscal imbalances are worsening and the global economic recovery is faltering.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses or speculate on creditworthiness, fell 2.6 basis points to a mid-price of 147.5 basis points as of 4:43 p.m. in New York, according to Markit Group Ltd. The index is up from 136.2 on Sept. 27 and earlier climbed to 154.1 basis points, the highest level since May 2009.

Credit-default swaps on Goldman Sachs Group Inc. increased 20.4 basis points to 415 basis points, and those tied to Charlotte, North Carolina-based Bank of America Corp.’s senior debt climbed 8.4 basis points to 465 after rising as high as 484.5, according to Phoenix.

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. Editors: Pierre Paulden, John Parry

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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