Bloomberg News

U.S. Corporate Credit Risk Falls on Economy, Europe Confidence

October 14, 2011

Oct. 14 (Bloomberg) -- A benchmark gauge of U.S. corporate credit risk fell for a second week as investors wager that Europe’s leaders will contain the region’s fiscal crisis, reducing risks that the world’s largest economy may slip into recession.

The Markit CDX North America Investment Grade Index, which typically drops as investor confidence improves and rises as it deteriorates, declined 2.3 basis points to a mid-price of 130.2 basis points as of 3:52 p.m. in New York, according to index administrator Markit Group Ltd.

Investors pushed the index lower as European leaders signaled that they’ll take the necessary steps to resolve the region’s debt crisis, reducing the odds it will spill over into the U.S. Confidence was also bolstered by Commerce Department data released today showing U.S. retail sales increased 1.1 percent in September, the most in seven months.

“Europe finally seems ready to take the financially painful steps necessary to contain the debt crisis,” Edward Marrinan, head of macro credit strategy at Royal Bank of Scotland Group Plc in Stamford, Connecticut, said today in an e- mail. Confidence also grew as data showed that the U.S. “is at less risk of slipping back into recession,” he said.

The gauge has decreased from 150.1 on Oct. 3 as policy makers developed a plan to prevent a Greek default from threatening the region’s banking system.

European officials are considering writedowns of as much as 50 percent on Greek bonds, a backstop for banks and continued central bank bond purchases in a revamped strategy to combat the debt crisis, people familiar with the discussions said. German Chancellor Angela Merkel and French President Nicolas Sarkozy pledged on Oct. 9 to deliver a comprehensive plan and said recapitalizing banks was a priority.

Investors use credit-default swaps to protect bonds against losses or to speculate on defaults. The 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: Zeke Faux in New York at zfaux@bloomberg.net

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


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