Bloomberg News

Credit Swaps in U.S. Rise as ECB Cuts Main Rate to Record Low

July 05, 2012

A gauge of U.S. company credit risk increased for the first time in a week as European Central Bank President Mario Draghi said today’s cut in interest rates to a record low would have a “muted” effect on the economy.

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, climbed 2.5 basis points to a mid-price of 109 basis points at 4:44 p.m. in New York, according to prices compiled by Bloomberg. Contracts tied to Limited Brands Inc. (LTD:US) declined after June sales beat estimates.

Policy makers meeting in Frankfurt today lowered the ECB’s main refinancing rate to a record low of 0.75 percent from 1 percent, as predicted by 49 of 64 economists in a Bloomberg News survey. The central bank also cut its deposit rate to zero from 0.25 percent as the sovereign-debt crisis threatens to push the euro region into recession and pressure the global economy.

“The reality is, after you’ve done this for year after year, do you really think that a 25-basis point cut in Europe is going to stimulate the economy?” Robert Grimm, a trader at broker-dealer Odeon Capital Group LLC in Greenwich, Connecticut, said in a telephone interview. “It’s symbolic more than it’s real.”

The 17-nation euro economy will shrink 0.3 percent this year, according to the European Commission, and unemployment rose to a record 11.1 percent in May.

‘Price Signals’

“It’s clear that when demand is weak the transmission of price signals to the aggregated economy is muted,” Draghi said at a press conference today.

China’s central bank also reduced its rates today, cutting the one-year lending rate by 31 basis points and the one-year deposit rate by 25 basis points starting tomorrow, according to a statement posted on the People’s Bank of China’s website. China is seeking to boost growth after the world’s second- largest economy expanded 8.1 percent in the first quarter from a year earlier, the least in almost three years and the fifth quarterly slowdown.

Concern that economic conditions in China and Europe may worsen “overshadowed” reports that showed fewer Americans than forecast filed for unemployment benefits last week and U.S. companies hired more workers in June than economists had estimated, Grimm said.

Jobless Claims

First-time applications for unemployment insurance fell by 14,000 in the week ended June 30 to 374,000, Labor Department data showed today. That’s less than the median forecast of 385,000 claims called for by 46 economists in a Bloomberg News Survey. Private payrolls grew by 176,000 in June, following a revised gain of 136,000 in May, according to Roseland, New Jersey-based ADP Employer Services. The median estimate of economists surveyed by Bloomberg News forecast a 100,000 advance.

Same-store sales at Limited, the parent company of Victoria’s Secret, increased 7 percent in June, beating the 2.6 percent average estimate of analysts surveyed by Retail Metrics Inc. The research firm said today that same-store sales at the more than 20 retailers it tracks rose 0.3 percent, compared with an average estimate of 1 percent.

The cost to guard against losses on Limited’s debt for five years decreased 10.9 basis points to a mid-price of 235.4 basis points at 4:04 p.m. in New York, Bloomberg prices show.

The swaps gauge typically rises as investor confidence deteriorates and falls as it improves. 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: Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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