Bloomberg News

Credit Swaps Rise as New U.S. Home Purchases Unexpectedly Fall

March 23, 2012

A benchmark gauge of U.S. company credit risk climbed for a second day as new-home sales unexpectedly fell in February, damping optimism a recovering housing market will bolster economic growth.

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 0.9 basis point to a mid-price of 91.4 basis points at 16:28 p.m. in New York, according to Markit Group Ltd. Credit swaps tied to homebuilders led by KB Home and Lennar Corp. (LEN) increased.

New home sales dropped to a 313,000 annual pace, the slowest since October, fueling concerns that an uneven recovery in the housing market will hinder growth and cap the biggest bond rally in more than a decade. Company bonds in the U.S. are poised for the worst losses since November, declining 0.7 percent this month after gaining 3.5 percent in January and February for the best start to a year since 2001, Bank of America Merrill Lynch index data show.

“Until housing prices stabilize it will be difficult to see a sustained recovery in the consumer-spending portion of the real economy,” Abdullah Karatash, head of U.S. fixed-income credit trading at Natixis SA in New York, wrote in an e-mail.

Home sales fell even as Labor Department figures released yesterday showed the number of Americans claiming jobless benefits declined to the lowest level in four years.

Homebuilder Swaps

Swaps on KB Home (KBH), the Los Angeles-based homebuilder that targets first-time buyers, jumped 52.3 basis points to a mid- price of 638.8 basis points, the biggest increase since Nov. 1, according to data provider CMA. The company said today that net orders in the three months ended Feb. 29 fell 8 percent from a year earlier.

KB Home’s $350 million of 8 percent notes due in March 2020 fell 2.5 cents to 99.5 cents on the dollar at 2:50 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Contracts on Lennar, the third-largest U.S. homebuilder by revenue, jumped 18.8 basis points to 292.5, the biggest jump since March 6, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Markit rolled out a new version of the CDX index, Series 18, this week after Series 17 reached a more than one-year low of 84.7 basis points on March 19. New versions of the index, which banks, hedge funds and other investors use to hedge against losses or to speculate on creditworthiness, are created in September and March. Companies are replaced if they no longer have appropriate credit grades, aren’t among the most actively traded borrowers or fail to meet other criteria.

Credit swaps typically rise as investor confidence deteriorates and fall as it improves. The contracts 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.

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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