Bloomberg News

Credit Swaps in U.S. Fall From Two-Month High on Earnings

April 11, 2012

A benchmark gauge of U.S. company credit risk dropped from the highest level since January after Alcoa Inc. (AA:US) posted an unexpected first-quarter profit, unofficially kicking off the earnings season.

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 by 2.5 basis points to a mid-price of 102 basis points at 5:05 p.m. in New York, according to Markit Group Ltd.

The gauge fell after Alcoa, the largest U.S. aluminum producer, reported yesterday that orders rose and it closed higher-cost smelting capacity. The cost to protect against a default by American Express Co. (AXP:US) fell 4 basis points to 82.5 basis points, according to data provider CMA. Analysts surveyed by Bloomberg estimate the biggest U.S. credit-card issuer by purchases next week will increase its quarterly earnings per share compared with a year earlier.

“The timing of the Alcoa news was fortuitous from the perspective of investors,” Andrew Wilkinson, chief economic strategist at Miller Tabak & Co., said in a telephone interview. “We’re seeing markets calm down because things possibly got blown out of proportion” over earlier concern about Europe’s debt crisis. Investors may be anticipating policy actions by European officials to spur growth, he said.

European Central Bank Executive Board member Benoit Coeure indicated in Paris that the bank may revive its bond purchase program to reduce Spain’s borrowing costs. Yields on Spanish 10- year bonds had climbed to a four-month high of 6.02 percent today before falling after Coeure spoke.

Spain Yields Drop

The swaps index, which typically falls as investor confidence improves and rises as it deteriorates, touched 105 basis points yesterday, the highest level since Jan. 25.

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.

The U.S. two-year interest-rate swap spread, a measure of bond-market stress, fell the most in more than a month, dropping 2.18 basis points to 29.51 basis points. The gauge narrows when investors favor assets such as corporate debt and widens when they seek the perceived safety of government securities.

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

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