Oct. 11 (Bloomberg) -- The cost to protect against losses on Morgan Stanley debt dropped to the lowest in almost three weeks after European leaders pledged this week to ensure the region’s banks have enough capital to withstand the sovereign debt crisis.
Credit-default swaps on Morgan Stanley bonds fell 41.7 basis points from Oct. 7 to 392.9 basis points, the lowest since Sept. 21, according to data provider CMA. The New York-based bank’s contracts have declined from 582.7 on Oct. 3, the highest since October 2008. Bond markets in the U.S. were closed yesterday for the Columbus Day holiday. A benchmark gauge of U.S. corporate credit risk tumbled to the lowest in three weeks.
The drop in swaps prices signals that investors are regaining some confidence in the banking system since German Chancellor Angela Merkel said Oct. 9 that the region’s leaders will do “everything necessary” to ensure that European banks are capitalized after meeting with French President Nicolas Sarkozy. Morgan Stanley’s swaps had led a surge in contracts on U.S. banks amid concerns that an escalating crisis in Europe would trigger losses globally.
“We have valuations in the market now that reflect the binary outcomes we’re facing as investors: whether we’re going to see a blowup in Europe or whether we’re going to see an austerity program in the U.S. or whether were going to somehow keep on keeping on with gridlock in Washington and the euro zone keeping together,” Jeffrey Gundlach, chief executive officer of Los Angeles-based DoubleLine Capital LP, which manages $17 billion, said in a webcast today.
Markit CDX Index
The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 4 basis points from Oct. 7 to a mid-price of 135.3 basis points, according to Markit Group Ltd. The index has fallen from 150.1 basis points on Oct. 3, the highest since May 2009. In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose 0.8 for the day to 179.1.
Both indexes typically decrease as investor confidence improves and rise as it deteriorates. 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, Alan Goldstein
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