Bloomberg News

U.S. Company Credit-Default Swaps Climb on Europe Crisis

April 13, 2012

A benchmark gauge of U.S. credit risk rose for the first time in three days after the cost to protect against losses on Spanish debt reached a record high, stoking concern that Europe’s fiscal crisis may spread globally.

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, climbed 5.3 basis points to a mid-price of 102.1 basis points at 4:58 p.m. in New York, according to Markit Group Ltd. The cost to protect debt issued by Wells Fargo & Co. increased after the bank reported earnings.

“The risk hasn’t gone away,” Scott MacDonald, head of research at MC Asset Management Holdings LLC in Stamford, Connecticut, said in a telephone interview. “It’s not even looming on the horizon -- it’s here.”

The gauge advanced as Spanish Prime Minister Mariano Rajoy struggles to prevent the nation from becoming the fourth euro- region member to need a bailout. Credit-default swaps on Spain rose to 498, topping the all-time high of 493 set Nov. 23 according to data provider CMA. Earlier the National Bureau of Statistics said in Beijing that gross domestic product in the world’s second-biggest economy expanded 8.1 percent in the first quarter from a year earlier after an 8.9 percent gain in the previous period.

The swaps index, which typically rises as investor confidence deteriorates and falls as it improves, tumbled 5.3 basis points yesterday, the most since Dec. 20.

Focusing on Risk

“We’re in the middle of the repricing,” MacDonald said. “We had a couple good days, but that’s because people decided they wanted to ignore all the risk that sits out there.”

Contracts tied to Wells Fargo (WFC:US)’s debt climbed 5.3 basis points to 97.5 basis points, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

Wells Fargo reported first-quarter earnings that topped analysts’ estimates on a surge in mortgage fees. Still, it faced higher charges related to mortgage lawsuits and set aside $430 million to cover mortgage repurchase claims, an increase from the $404 million in the fourth quarter.

Contracts on General Electric Co.’s finance unit General Electric Capital Corp. increased 13.4 basis points to 173.2, and those on Goldman Sachs Group Inc. (GS:US), which reports earnings (GS:US) on April 17, added 16.5 to 276.5, the data show, as the firm awarded Chairman and Chief Executive Officer Lloyd C. Blankfein 35 percent less in total compensation than a year earlier.

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.

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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Companies Mentioned

  • WFC
    (Wells Fargo & Co)
    • $55.34 USD
    • -0.13
    • -0.23%
  • GS
    (Goldman Sachs Group Inc/The)
    • $195.89 USD
    • 0.39
    • 0.2%
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