Bloomberg News

U.S. Company Credit-Default Swaps Climb on Europe Crisis Concern

December 15, 2011

Dec. 14 (Bloomberg) -- A benchmark gauge of U.S. credit risk rose for a third day as growing funding stress in Europe fueled concern the region is struggling to curb the debt crisis.

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 2.7 basis points to a mid-price of 130 basis points at 4:32 p.m. in New York, the highest level in two weeks, according to data provider Markit Group Ltd.

The measure climbed after Italy’s five-year yield increased at an auction today and default swaps protecting European sovereign debt traded near a record high. Borrowing costs for banks in the region climbed as plans made last week for a closer fiscal union fail to assuage concern that the euro area’s fiscal crisis may spread.

The index, which typically rises as investor confidence deteriorates and falls as it improves, has climbed from 121.9 on Dec. 9 on concern that European leaders may fail to prevent the region’s fiscal upheaval from tainting 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.

Lending Strains

The U.S. two-year interest-rate swap spread, a measure of stress in credit markets, increased for a fourth day, adding 1.87 basis points to 47.81 basis points, the widest level since Nov. 30. That’s up from this year’s low of 13.06 on April 28.

The cost for European banks to borrow in dollars rose for a fifth day to the highest in two weeks, according to money-market indicators. The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 147 basis points below the euro interbank offered rate, from 141 basis points yesterday. The gap has widened by 38 basis points since the European Central Bank cut its main interest rate on Dec. 8.

--With assistance from Namitha Jagadeesh in London. Editor: Mitchell Martin

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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