Bloomberg News

Credit Swaps in U.S. Climb as Payrolls Rise Less Than Forecast

July 06, 2012

A gauge of U.S. corporate debt risk rose for a second day after U.S. employment increased less than forecast, fueling concerns that labor-market growth is cooling.

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, increased 3.7 basis points to a mid-price of 112.7 basis points at 5 p.m. in New York, according to prices compiled by Bloomberg. Contracts tied to Seagate Technology Plc (STX:US) increased after it said fourth-quarter earnings would be lower than earlier reported.

The swaps rose as concern mounted that a faltering labor market may derail economic growth and imperil profits, making it harder for borrowers to meet debt payments. Payroll gains missed estimates by 20,000 and private corporate hiring was the weakest in 10 months, Labor Department data showed today.

“This number, while it’s only a slight miss, is still indicative of an economy that’s growing very, very slowly,” Brian Reynolds, chief market strategist for institutional brokerage firm Rosenblatt Securities Inc., said in a telephone interview.

Payrolls increased by 80,000 workers in June, after a revised gain of 77,000 in May, according to the Labor Department. The median forecast of 84 economists surveyed by Bloomberg News called for an advance of 100,000. The unemployment rate held at 8.2 percent as private employment increased by 84,000.

Fed Action

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.

“This number it’s not great, but it’s not horrible, so it may not force the Fed into immediate action,” Reynolds said. “The central bank is probably on the sidelines for the next month or so and that leaves investors with not much to make them want to buy risky assets. The result is we’ve started to see some spread-widening this morning.”

Seagate, the world’s largest maker of computer disk drives, expects to report fiscal fourth-quarter sales of $4.5 billion, down from earlier forecasts of at least $5 billion, the Dublin- based company said today in a statement. The technology firm will report full earnings results on July 30.

The cost to guard against losses on the debt of a unit of Seagate increased 7.3 basis points, the most in two weeks, to a mid-price of 305.8 basis points at 5:02 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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Companies Mentioned

  • STX
    (Seagate Technology PLC)
    • $67.44 USD
    • 2.43
    • 3.6%
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