Bloomberg News

Credit Swaps in U.S. Fall as Factory Orders, Auto Sales Advance

July 03, 2012

A benchmark gauge of U.S. corporate debt risk was poised to fall to the lowest level in almost two months as automakers reported sales that beat estimates and U.S. factory orders rose for the first time in three months.

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark used to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 2.7 basis points to a mid-price of 106.5 basis points at 1:42 p.m. in New York, according to prices compiled by Bloomberg. That’s the lowest on an intra-day basis since May 11.

The 0.7 percent increase in orders placed with U.S. factories followed a revised 0.7 percent drop in the prior month, the Commerce Department said today in Washington, easing concern that manufacturing is faltering. The median forecast of economists in a Bloomberg News survey called for a rise to 0.1 percent. General Motors Co. (GM:US), Ford Motor Co. and Chrysler Group LLC reported U.S. sales for June that topped analysts’ estimates, helping stay on pace for the best year since 2007.

“Factory order data and good sales from Chrysler and Ford are supporting the economic backdrop,” Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc. in New York, wrote in an e-mail.

Auto Sales

U.S. auto sales may have accelerated to faster than a 14 million seasonally adjusted annualized rate, GM and Chrysler said in e-mailed statements. The forecasts top the 13.8 million light-vehicle pace that was the average estimate of 15 analysts surveyed by Bloomberg.

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.

The credit-default measure fell as speculation grew that central banks will act to spur growth. The Federal Open Market Committee decided June 20 to extend its program to lower borrowing costs by replacing short-term bonds with longer- maturity debt, known as Operation Twist. Federal Reserve Chairman Ben S. Bernanke signaled after the announcement that the central bank will consider additional stimulus, including asset purchases, if employment stalls.

The European Central Bank is forecast by economists to cut interest rates this week to mitigate the debt crisis, while possible weakening U.S. employment may spur the Fed to pursue more large-scale bond purchases, or quantitative easing, according to BNP Paribas SA.

To contact the reporters on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net; Mary Childs in New York at mchilds5@bloomberg.net

To contact the editor responsible for this story: Richard Bravo at rbravo5@bloomberg.net


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