Bloomberg News

U.S. Corporate Credit Risk Climbs as Fitch Cites Contagion Risk

November 17, 2011

Nov. 16 (Bloomberg) -- A benchmark gauge of U.S. credit- default swaps rose to the highest level in five weeks as Fitch Ratings said further contagion from Europe’s debt crisis would pose a risk to American banks.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, added 2.3 basis points to a mid- price of 134.6 basis points at 5:01 p.m. in New York, the highest level since Oct. 11, according to index administrator Markit Group Ltd. Credit default swaps on U.S. banks rose, led by Morgan Stanley and Goldman Sachs Group Inc.

Traders pushed the swaps index higher for a third day as Fitch said that while U.S. lenders have “manageable direct exposures” to Greece, Ireland, Italy, Portugal and Spain, further turmoil poses a “serious risk” to U.S. banks’ creditworthiness. The credit gauge has climbed from a two-month low of 113.4 basis points on Oct. 27 even as economic data signals the U.S. economy may avoid recession.

“The market remains pretty fixated on Europe and all the ups and downs from policy makers,” George Bory, chief corporate credit strategist for UBS AG, said in a telephone interview from London. “The renewed weakness in bond markets has put a little bit more pressure on credit markets overall, which really limits the ability for people to take risk going into the end of the year.”

Contracts on Morgan Stanley increased 24.6 basis points to 459.6 basis points, while those on Goldman Sachs added 18 to 367.9, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Bank of America Corp. added 17.8 basis points to 402.8, the data show.

The credit swaps index, which typically rises as investor confidence deteriorates and falls as it improves, has increased even as some U.S. economic reports have signaled consumers are spending at a faster rate than analysts expected. U.S. retail sales rose 0.5 percent in October, according to Commerce Department figures yesterday, exceeding the median forecast of 81 economists surveyed by Bloomberg News for a rise of 0.3 percent.

“Domestic economic data has continued to improve over the period, providing a favorable fundamental backdrop,” Anthony Valeri, a market strategist with LPL Financial in San Diego, which oversees $330 billion, said in a note to clients. “European headlines are likely to keep prices volatile over the near term.”

Contracts on Lowe’s Cos. climbed as it sold $1 billion of debt a day after its credit grade was lowered by Standard & Poor’s. The second-largest U.S. home-improvement retailer sold 10- and 30-year bonds with proceeds to be used for stock buybacks, capital expenditures, acquisitions or working capital, according to a regulatory filing today.

Credit-default swaps on the Mooresville, North Carolina- based company climbed 3.5 basis points to 106.8 basis points, according to CMA.

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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