Bloomberg News

Corporate Credit Risk Drops Amid Europe Efforts to Curb Crisis

November 29, 2011

Nov. 28 (Bloomberg) -- Benchmark gauges of credit risk in the U.S. and Europe dropped amid speculation that European leaders are intensifying efforts to contain the region’s debt crisis. Credit-default swaps on Goldman Sachs Group Inc. and Morgan Stanley also tumbled.

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, dropped 4.9 basis points to a mid-price of 141.1 basis points at 4:41 p.m. in New York, the biggest decline since Oct. 27, according to Markit Group Ltd. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 6.5 to 198.8, the largest decrease in more than two weeks.

The indexes are dropping from levels reached at the start of October, when the CDX jumped to the highest since May 2009. Both benchmarks improved in October on similar optimism that European leaders were making progress in responding to the sovereign fiscal crisis. Without more details, this rally may be short-lived, JPMorgan Chase & Co. strategists said today in a note to clients.

“We do not expect a similar rebound without significantly more clarity on the potential plans, given how short-lived the last rally was,” JPMorgan Chase & Co. strategists led by Eric Beinstein in New York wrote in the note. “But some rebound after the strong sell-off seems more likely than not in the coming days as these initiatives get more attention.”

Budget Discipline

The Markit CDX index, which typically falls as investor confidence improves and rises as it deteriorates, has decreased from 150.1 basis points on Oct. 3, after climbing last week by 10.2, the most since the period ending Sept. 23. The iTraxx Europe index reached 208 basis points on Nov. 23, about the same level it reached on Oct. 4 when it was the highest end-of-day price since December 2008, Markit prices show.

Traders pushed the measures lower after German Finance Minister Wolfgang Schaeuble urged fast-track treaty changes to tighten budget discipline and as speculation mounted that policy makers are planning to provide more aid for Italy.

German Chancellor Angela Merkel will deliver a speech on the crisis to the lower house of parliament in Berlin on Dec. 2, previewing a Dec. 9 summit of leaders as Germany steps up demands for treaty change to lock in tighter budget controls for the 17 euro member states.

The 440-billion euro European Financial Stability Facility may begin insuring bonds of troubled countries with guarantees of between 20 percent and 30 percent of each issue, according to guidelines for a meeting of the region’s finance ministers this week.

More Details

Swaps tied to New York-based Goldman Sachs fell 45 basis points to 396 basis points, the biggest decline since Oct. 27, according to data provider CMA. That means investors are paying $396,000 annually to protect $10 million of debt for five years. Contracts on Morgan Stanley fell 34 to 501 and swaps on Bank of America Corp. declined 28 to 462.

Credit investors likely will need to see more details on funding sources for the bailout for a sustained rally, the JPMorgan strategists said.

“Progress on broader fiscal integration and changes in governance in the Eurozone are unlikely to calm markets if it isn’t clear where funding for the peripherals is going to come from over the next couple of years, should markets remain unwilling to lend at sustainable yields,” they wrote.

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.

--With assistance from Simon Kennedy in Paris and Tony Czuczka in Berlin. Editors: Pierre Paulden, John Parry

To contact the reporter on this story: Shannon D. Harrington in New York at

To contact the editor responsible for this story: Alan Goldstein at

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