Bloomberg News

Credit-Default Swaps in U.S. Rise After China Cuts Growth Target

March 05, 2012

A benchmark gauge of U.S. company credit risk rose to the highest level in a week after China pared its economic growth target.

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, increased 1.4 basis points to a mid-price of 95.3 basis points at 5:10 p.m. in New York, according to Markit Group Ltd. Contracts tied to Wells Fargo & Co. and JPMorgan Chase & Co. also climbed.

The gauge increased for a second straight day after Premier Wen Jiabao said China’s economic growth target has been cut to 7.5 percent from an 8 percent goal in place since 2005. Global stocks dropped.

Slower growth in China is impacting “cyclically oriented” names, according to Rizwan Hussain, a New York-based credit strategist at Morgan Stanley. “The other thing people are wrestling with is we’ve had recently a string of somewhat softer-than-expected data,” he said in a telephone interview.

European services and manufacturing output shrank in February more than earlier estimated, Markit Economics said, and U.S. factory orders fell in January for the first time in three months. Greece’s private creditors decide this week whether to sign off on the country’s debt restructuring.

Contracts on ArcelorMittal, the Luxembourg-based steel producer, climbed 22.2 basis points to 416.9 basis points, according to data provider CMA.

Highest This Month

The swaps index, which typically rises as investor confidence deteriorates and falls as it improves, reached 95.9 today, the highest level on an intraday basis since Feb. 27. 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.

“Today’s pullback isn’t so much about investor nervousness as it is about profit taking in the secondary markets and heavy new issuance,” said Guy LeBas, chief fixed-income strategist in Philadelphia at Janney Montgomery Scott LLC, which oversees $12 billion in fixed-income assets. “The list of new issues is coming in pretty strong,” pushing issuer’s credit-default swap spreads higher, he said.

Contracts tied to Wells Fargo debt added 6.4 basis points to 94.5, and those on JPMorgan climbed 7.2 basis points to 114, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Swaps on Goldman Sachs Group Inc.’s debt climbed 19.2 basis points to 250.

The U.S. two-year interest-rate swap spread, a measure of stress in credit markets, widened 1.06 basis points to 25.75 basis points. The measure falls when investors favor assets such as corporate bonds and rises when they seek the perceived safety of government securities.

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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