Bloomberg News

Default Swaps in U.S. Increase as Greece Heads for New Elections

May 15, 2012

A gauge of U.S. corporate credit risk rose for a ninth day, reversing earlier declines, as attempts to form a new government in Greece failed, clearing the way for a new round of elections.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, climbed 2.7 basis points to a mid-price of 117.4 basis points at 5 p.m. in New York, according to prices compiled by Bloomberg. The gauge had earlier declined to as low as 112.8 basis points.

The swaps index jumped as post-election attempts to form a ruling coalition in Athens broke down, sending Greece back to the polls next month. Surveys give the lead to an anti-bailout party that has opposed the conditions attached to the country’s rescue package, spurring investor concern the region’s sovereign-debt crisis will escalate.

“You have people so risk averse that they don’t wait to look for fire,” said Scott Colyer, chairman and chief executive officer of Advisors Asset Management Inc. in Monument, Colorado. “It was the failure of Greece to put together any government that has resulted in this widening.”

The index fell earlier in the day as the Federal Reserve Bank of New York’s general economic index increased to 17.1 this month from 6.6 in April, almost double the median estimate of 9 in a survey of Bloomberg economists. Readings greater than zero signal expansion.

JPMorgan Goes Underweight

Last time the credit-default swaps index, which typically rises as investor confidence deteriorates, increased for more than nine days was in July 2007, Bloomberg data show. 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.

JPMorgan Chase & Co. changed its recommendation on investment-grade corporate bonds to underweight from neutral, citing the situation in Europe and slowing growth in emerging markets.

“There is not enough evidence that the firewalls to avoid contagion to Spain and Italy are up to the task of avoiding broader stress in Europe,” analysts led by Eric Beinstein said in a note today.

The U.S. two-year interest-rate swap spread, a measure of stress in credit markets, widened 1.1 basis points to 39 basis points. The measure, which rises when investors seek the perceived safety of government securities and falls when they favor assets such as corporate bonds, has increased from a 2012 low of 23.5 in March.

To contact the reporters 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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