Bloomberg News

U.S. Corporate Credit Risk Climbs on Europe Debt Crisis Concern

November 01, 2011

Oct. 31 (Bloomberg) -- A benchmark gauge of U.S. corporate credit risk climbed the most in five weeks on concern European leaders will struggle to raise enough funds to curb the region’s debt crisis.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, added 7.3 basis points to a mid- price of 121.4 basis points at 4:56 p.m. in New York, the biggest jump since Sept. 22, according to index administrator Markit Group Ltd.

Traders pushed the index higher, wagering that creditworthiness could suffer globally if sell-offs in European sovereign bond markets accelerate and the region’s banks weaken. European leaders are seeking financial support from foreign governments after agreeing last week to boost their bailout fund.

The measure, which rises as investor confidence deteriorates and falls as it improves, has increased from a more than two-month low on Oct. 27 as investors question whether Europe’s rescue plan will prevent the region’s debt market upheaval from contaminating banks’ balance sheets. Investors are waiting for details of the bank recapitalizations announced last week, said Noel Hebert, a credit strategist at Mitsubishi UFJ Securities USA Inc. in New York.

“You still have a lot of holes which need to be filled in,” Hebert said in a telephone interview.

European officials last week struck an agreement to increase the size of their rescue fund to 1 trillion euros ($1.4 trillion) and persuaded bondholders to take 50 percent losses on Greek debt. Measures also included a recapitalization of the region’s banks.

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.

--Editor: 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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