Bloomberg News

U.S. Company Credit Swaps Hold at Almost 2-Week High on Europe

December 16, 2011

Dec. 15 (Bloomberg) -- A benchmark gauge of credit risk held at about a two-week high on concern that Europe’s debt crisis may spread, even after Spain sold almost twice the maximum target at a government bond auction and data signaled the U.S. economy is strengthening.

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, decreased 0.2 basis point to a mid-price of 129.8 basis points at 5:14 p.m. in New York, according to Markit Group Ltd.

The measure, which typically rises as investor confidence deteriorates and falls as it improves, has climbed from 121.9 on Dec. 9 on speculation that European leaders may fail to prevent the region’s fiscal strains from infecting bank balance sheets worldwide. That concern outweighed a report showing the fewest workers in three years filed claims for U.S. jobless benefits last week.

“The macro headwinds are getting stronger,” said Stanley Crouch, who helps oversee more than $2 billion as chief investment officer at New York-based Aegis Capital Corp. Crouch said. “The overall trend given the macro picture has to be bearish and given the overall situation in Europe,” he said.

International Monetary Fund Managing Director Christine Lagarde said today Europe’s debt crisis is escalating beyond the point where one group of nations can solve it.

The credit swaps measure has risen from 79 basis points on Feb. 8 to as high as 154 on Oct. 10.

The contracts 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.

Spain Auction

Spain sold bonds due in 2016 at an average yield of 4.023 percent, compared with 5.276 percent when securities of a similar maturity were offered on Dec. 1, the Treasury said.

“Any borrower in Europe is going to borrow if they see demand,” Couch said. “They’re going to borrow as much as they can while the window’s open, because who knows? It can change in the wind.”

The U.S. two-year interest-rate swap spread, a measure of stress in credit markets, snapped four days of increases, narrowing 0.91 basis point to 46.9 basis points. The gauge, which contracts when investors buy riskier assets and widens when they seek the perceived safety of government bonds, has increased from this year’s low of 13.06 on April 28.

--With assistance from Daniel Tilles in London. 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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