Bloomberg News

Credit-Default Swaps in U.S. Fall to Two-Month Low on Economy

January 04, 2012

Jan. 3 (Bloomberg) -- A benchmark gauge of U.S. company credit risk dropped to the lowest level in two months as evidence of manufacturing strength in America and China stoked optimism the global economy will weather Europe’s debt turmoil.

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 1.6 basis points to a mid-price of 118.7 basis points at 2:02 p.m. in New York, according to Markit Group Ltd. The index fell as low as 117.6, the least since Oct. 31. Contracts on Bank of America Corp. and Goldman Sachs Group Inc. also fell.

The credit swaps gauge, which typically falls as investor confidence improves and rises as it deteriorates, has dropped from 132.1 on Dec. 19 as data signal the world’s largest economy is recovering. U.S. manufacturing grew in December at the fastest pace in six months, an Institute for Supply Management report indicated today. Last month, data showed consumer confidence at an eight-month high, while unemployment fell in November to 8.6 percent.

“The breadth of data improvement has been pretty good of late,” Rizwan Hussain, a New York-based credit strategist at Morgan Stanley, said in a telephone interview. Better-than- expected ISM figures “provide a decent ramp going into 2012.” While economists aren’t forecasting the U.S. economy will grow at 4 percent, “at least you have a better growth rate trajectory in the back half of the year,” Hussain said.

Manufacturing Expands

Tempe, Arizona-based ISM’s factory index climbed to 53.9 last month from 52.7 in November. Fifty is the dividing line between growth and contraction, and economists surveyed by Bloomberg News forecast the gauge would rise to 53.5. China’s manufacturing purchasing managers’ index rose last month, the National Bureau of Statistics and Federation of Logistics and Purchasing reported Jan. 1.

Credit-default swaps on Bank of America decreased 20 basis points to 384.3 basis points as of 11:55 a.m. in New York, according to data provider CMA. Contracts tied to the debt of Goldman Sachs eased 14.5 basis points to 310.5, and those linked to Citigroup Inc. fell 12.6 basis points to 271.6.

Default swaps on General Electric’s finance unit General Electric Capital Corp. declined 12.5 basis points to 242.4, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

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.

--Editors: John Parry, Shannon Harrington

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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