Bloomberg News

Default Swaps in U.S. Decline as European Leaders Meet on Crisis

January 23, 2012

Jan. 23 (Bloomberg) -- A benchmark gauge of U.S. company credit risk fell for a fifth day in the longest stretch of decreases in more than a month on optimism European officials may craft a long-term plan to contain the region’s 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, slid 0.8 basis point to a mid-price of 105.2 basis points at 12:58 p.m. in New York, according to Markit Group Ltd. Contracts tied to the debt of Ally Financial Inc. and Caesars Entertainment Corp. also fell.

The gauge dropped to a five-month low as European Union finance ministers gathered in Brussels to discuss new budget rules, a financial firewall to protect indebted states and a Greek debt swap. Greece and private bondholders said they had made progress in talks in Athens.

“Market sentiment is positive right now, but given all the unknowns and all the uncertainties down the line, I’m a little concerned about the extent of this rally,” Mikhail Foux, a credit strategist at Citigroup Inc. in New York, said in a telephone interview.

The index, which typically falls as investor confidence improves and rises as it deteriorates, was at the lowest level since August.

Swaps tied to Ally declined 51.8 basis points to 505 basis points at noon in New York, according to data provider 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.

Contracts on Caesars eased 1.9 percentage points to 44 percent upfront, the data show. That’s in addition to 5 percent a year, meaning it would cost $4.4 million initially and $500,000 annually to protect $10 million of Caesar’s debt.

The U.S. two-year interest-rate swap spread, a measure of stress in credit markets, narrowed 1 basis point to 34.19 basis points. The measure falls when investors favor assets such as corporate bonds and rises when they seek the perceived safety of government securities.

--Editors: John Parry, Mitchell Martin

To contact the reporter on this story: Mary Childs in New York at

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

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