Bloomberg News

Company Credit-Default Swaps in U.S. Rise on European Concern

January 06, 2012

Jan. 5 (Bloomberg) -- A benchmark gauge of U.S. company credit risk increased for a second day on concern that Europe’s debt crisis may worsen as borrowing costs rise.

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, rose by 1.5 basis points to 120 basis points at 4:51 p.m. in New York, according to Markit Group Ltd. Swaps on J.C. Penney Co., the Plano, Texas-based department-store chain, climbed 28.5 to 327.9, according to data provider CMA.

The gauge, which typically rises as investor confidence deteriorates, climbed as France’s borrowing costs rose in the country’s first auction of the year, Europe’s bailout fund drew less demand in a bond sale and Greek Prime Minister Lucas Papademos called for income cuts to avert an economic collapse. Investors in U.S. markets are trying to assess the impact of a potential Greek default as European leaders struggle to rescue the indebted nation and defend the region’s common currency.

“There’s still a tremendous amount of disagreement or uncertainty over exactly what to do with Greece,” Noel Hebert, a credit strategist at Mitsubishi UFJ Securities USA Inc. in New York, said in a telephone interview. “People are trying to read the proverbial tea leaves.”

Swaps on Bank of America Corp. fell 13.2 basis points to 376.7, the lowest since Nov. 8, CMA data show.

No Plans

The cost of buying insurance on the bank’s debt fell on speculation that the Obama administration might provide more aid to homeowners. The White House has no plans for a new mass mortgage refinancing program, an administration official with knowledge of the matter said.

Greece’s Papademos said yesterday deeper cuts in incomes and an accord on foreign aid are the only way for the country to avert economic collapse and a “disorderly default.” Investors ordered about 4.5 billion euros ($5.8 billion) of 3 billion euros of the European Financial Stability Facility’s notes compared with demand of nine times on its first deal a year ago.

Swaps on J.C. Penney rose after the retailer cut its fourth-quarter profit forecast, citing declining sales. U.S. companies face the risk of reduced lending by European banks this year as the crisis worsens, Mark Oline, an analyst at Fitch Ratings, wrote today in a report.

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, Dennis Fitzgerald

To contact the reporter on this story: Zeke Faux in New York at zfaux@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.


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