Bloomberg News

Credit-Default Swaps in U.S. Fall to Six-Month Low on Jobs Gain

February 03, 2012

Feb. 3 (Bloomberg) -- A benchmark gauge of U.S. company credit risk fell to the lowest level since August after the jobless rate unexpectedly declined to a three-year trough, stoking optimism that the world’s biggest economy is improving.

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, dropped by 4.8 basis points to a mid-price of 94.3 basis points at 4:47 p.m. in New York, according to Markit Group Ltd. That was the lowest level since Aug. 1 on an intra-day basis. Contracts tied to the debt of Glencore International Plc and Genworth Financial Inc. also fell.

The gauge declined after the Labor Department reported that the unemployment rate decreased to 8.3 percent, the lowest since February 2009. A 243,000 increase in payrolls was the most since April, exceeding all forecasts in a Bloomberg News survey. The report came after Federal Reserve Chairman Ben S. Bernanke said yesterday the economy has shown signs of improvement, boosting optimism in corporate profits and creditworthiness.

“The credit markets are particularly sensitive to changes in the labor market outlook,” said Guy LeBas, chief fixed- income strategist at Janney Montgomery Scott LLC in Philadelphia. “The expectation is that we will see improved economic profitability.”

Service industries in the U.S. expanded at the fastest pace in almost a year, boosting confidence that the economic recovery is stronger than previously thought. The Institute for Supply Management’s non-manufacturing index rose more than forecast to 56.8 in January from 53 in December.

Genworth CDS Drop

The swaps index, which typically falls as investor confidence improves and rises as it deteriorates, was poised for its biggest daily decline since Dec. 20. The measure has declined for four straight weeks.

Swaps tied to Genworth Financial declined 118.1 basis points to 454.3 basis points, while those tied to Glencore International fell 25.4 to 216.6, 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.

--Editors: John Parry, Mitchell Martin

To contact the reporter on this story: Sridhar Natarajan in New York at snatarajan15@bloomberg.net;

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


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