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A benchmark gauge of U.S. company credit risk dropped to the lowest level since July as consumer confidence jumped and the European Central Bank prepared to provide a second round of unlimited funds to banks tomorrow to help ease sovereign-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 1.7 basis points to a mid-price of 93.7 basis points as of 5:27 p.m. in New York, according to Markit Group Ltd. That’s the lowest on a closing basis since July 22. Contracts on some of the biggest U.S. banks including Citigroup Inc. (C) also fell.
The gauge slid after the Conference Board’s index of consumer confidence increased this month to 70.8, the highest in a year. European banks will probably tap the ECB for 470 billion euros ($633 billion) in three-year funds in its long-term refinancing operation, according to a Bloomberg News survey of analysts. Standard & Poor’s cut Greece’s credit ratings to “Selective Default” yesterday.
The swaps index, which typically falls as investor confidence improves and rises as it deteriorates, has dropped from 102.6 basis points on Jan. 30.
Credit-default swaps tied to Citigroup fell 13.4 basis points to 220.1 basis points, according to data provider CMA.
Contracts on JPMorgan Chase & Co. (JPM)’s debt eased 5.9 basis points to 109.6, and those on Wells Fargo & Co. (WFC) decreased 3.3 basis points to 100. Swaps on Bank of America Corp. fell 10 basis points to 260, 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.
Contracts on MBIA Inc. (MBI)’s structured-finance unit, MBIA Insurance Corp., also declined, falling 1.9 percentage points to 26.5 percent upfront. That’s in addition to 5 percent a year, meaning investors pay $2.65 million initially and $500,000 annually to protect $10 million of the unit’s debt.
The International Swaps & Derivatives Association’s determinations committee, which governs credit-default swaps, agreed to rule whether Greece’s parliament triggered payouts on the contracts.
The restructuring, in which bondholders take a 53.5 percent reduction in the value of their investments, uses collective action clauses to discourage holdouts. The use of such clauses would trigger swap contracts, according to ISDA rules.
The committee is being asked whether the contracts have already been triggered because the deal gives the European Central Bank and national central banks “a change in the ranking in priority of payment” by allowing them to exchange out of their eligible debt prior to the collective-action clause taking effect, according to the ISDA website.
While the market consensus is that the CACs will be activated, forcing a default and triggering the contracts, Greece may complete its proposed bond exchange to reduce outstanding debt without resorting to use of CACs, according to Francesco Garzarelli, co-head of fixed-income strategy at Goldman Sachs Group Inc. in London.
A voluntary participation rate of more than 75 percent in the exchange is possible, and Greece has indicated that may be sufficient for the transaction to be “completed without CACs, subject to consent from” Greece’s currency union partners, he wrote in a note to clients today. That “would represent a positive outcome for broader markets,” he wrote.
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