Bloomberg News

U.S. Company Credit Risk Rises to 7-Week High on Europe Crisis

November 27, 2011

Nov. 25 (Bloomberg) -- A benchmark gauge of U.S. company credit risk is poised to rise for the fourth week as Italy’s borrowing costs surged, fueling concern that Europe’s fiscal crisis is intensifying. The cost to protect Bank of America Corp. debt increased to a record.

The Markit CDX North America Investment Grade Index of credit default swaps, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 1.7 basis points to a mid-price of 147.6 basis points at 1:19 p.m. in New York, according to Markit Group Ltd.

Traders pushed the measure to the highest since Oct. 5 after Italy had to pay almost 7 percent to sell six-month bills at an auction today and Reuters reported that Greece is demanding that private investors accept larger losses on their debt. Rising sovereign borrowing costs are adding to concern that Europe’s fiscal crisis will infect bank balance sheets worldwide and derail credit markets.

“We’re nearing the final chapter in terms of the meltdown within financial markets,” Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York, said in an e-mail note. “Change is now in the air and although sentiment continues to weaken, there is an emergent catalyst that could serve to invite and revoke a market capitulation.”

The credit swap index, which typically rises as investor confidence deteriorates and falls as it improves, climbed from 135.9 on Nov. 18 and has increased from a two-month low of 113.4 on Oct. 27.

Bank of America Swaps

Credit-default swaps tied to Bank of America’s debt increased 8.9 basis points to 488.8 as of 11:46 a.m. in New York, according to data provider CMA. That means investors are paying $488,800 annually to protect $10 million of debt for five years.

The contracts on the Charlotte, North Carolina-based lender have climbed from 413 on Nov. 18, and 334.9 since the end of October, the data show. The swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt.

Investor confidence in U.S. high-yield, high-risk debt fell to the lowest level since Oct. 6. The Markit CDX North America High Yield Index, which falls as investor confidence deteriorates, decreased 0.5 percentage point to 87.4 percent of face value.

Interest-rate swap spreads, a measure of stress in credit markets, rose. The difference between the two-year swap rate and the comparable-maturity Treasury note yield added 13 basis points to 54.63 basis points, according to data compiled by Bloomberg. The measure, which gains when investors favor government bonds, has risen from 32.5 on Oct. 31, and earlier climbed as high as 56.5. A basis point is 0.01 percentage point.

--Editors: Pierre Paulden, Alan Goldstein

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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