Bloomberg News

Default Swaps in U.S. Fall Before EU Leaders Meet to Stem Crisis

May 22, 2012

A gauge of corporate credit risk fell for the second day amid optimism European leaders will step up efforts to contain the region’s sovereign-debt crisis and as home sales in the U.S. increased more than estimates.

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, dropped 2.8 basis points to a mid-price of 115.1 basis points at 12:50 p.m. in New York, according to prices compiled by Bloomberg. The index fell 5.5 basis points yesterday from a five-month high of 123.4 basis points.

The gauge is declining as German Finance Minister Wolfgang Schaeuble said yesterday European leaders will do “everything necessary” to prevent Greece’s exit from the region’s single currency. European leaders are scheduled to meet in Brussels tomorrow to discuss measures for growth in Europe and ways to stem the crisis. Sales of existing U.S. homes increased to a 4.62 million annual rate in April, the highest in three months.

“The Europeans have been on board with having Greece as part of the euro zone and there is no reason for them to change their line,” Marc Pinto, head of corporate bond strategy at Susquehanna International Group LLP in New York, said in a telephone interview. “We are in a period of volatility where one headline is moving the market in one direction and another headline is moving it the other way.”

The swaps gauge typically falls as investor confidence improves and rises as it deteriorates. 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: 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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