Bloomberg News

Default Swaps in U.S. Decline as Euro Finance Chiefs Plan Talks

June 08, 2012

An index of U.S. corporate credit risk dropped as euro-area finance chiefs plan weekend talks to discuss a potential aid request from Spain.

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, declined 1.2 basis points to a mid-price of 120.7 basis points at 4:06 p.m. in New York, according to prices compiled by Bloomberg. Credit swaps tied to Morgan Stanley (MS:US) recorded the biggest weekly fall since March and the most among large U.S. banks.

Spain is poised to become the fourth of the 17 countries in the European common currency bloc to require emergency assistance as the region’s leaders battle to find measures to stem the sovereign-debt crisis. The bid may come as soon as tomorrow when finance ministers hold a conference call, according to a person familiar with the plans who declined to be identified because the matter is confidential.

“As investors started getting concrete information that Spanish officials are meeting, we began to see reversals,” said Randy Woodbury, a portfolio manager and trader at Des Moines, Iowa-based Principal Global Investors, which oversees about $258 billion in assets. “We are in a vacuum until the Greek elections and markets will be pushed by headlines both positive and negative.”

European Central Bank Vice President Vitor Constancio said today that a Spanish request is “awaited” and will be “exclusively directed at the recapitalization of banks.”

Greece Elections

Greece will hold elections on June 17 that may determine if the nation stays in the region’s common currency.

The cost to protect against losses on the debt of Morgan Stanley declined this week by 42 basis points to a mid-price of 406.4 basis points at 3:38 p.m., Bloomberg prices show. That’s the biggest fall since dropping 43.2 basis points in the week ended March 16.

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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Companies Mentioned

  • MS
    (Morgan Stanley)
    • $35.01 USD
    • 0.28
    • 0.8%
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