Bloomberg News

U.S. Corporate Credit Risk Climbs as Italy Borrowing Costs Surge

November 27, 2011

Nov. 25 (Bloomberg) -- A benchmark gauge of U.S. credit risk rose to the highest level in seven weeks as Italy’s borrowing costs surged at an auction, stoking concern that Europe’s debt crisis is spreading.

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, added 1.4 basis points to a mid-price of 147.3 basis points at 8:23 a.m. in New York, the highest level since Oct. 5, according to index administrator Markit Group Ltd.

Italy had to pay almost 7 percent to sell six-month bills at an auction today, fanning investor concern that the world’s fourth-biggest borrower may struggle to finance its debt. The cost of insuring European sovereign bonds against default rose to a record, increasing concern that the region’s debt crisis will curb the U.S. economic recovery.

The index, which typically rises as investor confidence deteriorates and falls as it improves, has increased from a two- month low of 113.4 on Oct. 27 as investors wager that Europe’s fiscal crisis will infect bank balance sheets worldwide.

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.

Investor confidence in U.S. high-yield, high-risk debt fell to the lowest level since Oct. 6. The Markit Group Ltd. CDX North America High Yield Index , a credit-default swaps index which falls as investor confidence deteriorates, dropped 0.5 percentage point to 87.3 percent of face value as of 8:37 a.m. in New York.

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 increased 1.25 basis points to 55.75 basis points as of 8:43 a.m. in New York, according to data compiled by Bloomberg. The measure, which gains when investors favor government bonds, has risen from 32.5 on Oct. 31. A basis point is 0.01 percentage point.

To contact the reporter on this story: John Parry in New York at

To contact the editor responsible for this story: Pierre Paulden at

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