Bloomberg News

Credit Swaps in U.S. Fall as Europe Speeds Aid to Spanish Banks

July 10, 2012

A benchmark gauge of U.S. corporate debt risk declined the most in a week as European finance ministers agreed to buttress Spanish banks and U.K. manufacturing output unexpectedly rose.

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 basis points to a mid-price of 111.5 basis points at 5:27 p.m. in New York, according to prices compiled by Bloomberg. Contracts tied to Advanced Micro Devices Inc. (AMD:US) increased after the company reported a decline in sales.

European governments will jump-start emergency loans to support Spain’s banks, allaying investor concerns that the financial and economic turmoil in Europe will sap global profits and undermine companies’ ability to repay debt. Euro-area finance chiefs agreed to pump as much as 100 billion euros ($123 billion) in loans into Spanish lending firms, making 30 billion euros available by the end of this month.

“Europe is going to continue to move slowly, but ultimately toward a central bank,” John Lekas, chief executive officer at Portland, Oregon-based broker-dealer Leader Capital Corp., said in a telephone interview. “It’s caused some pain and suffering, but actually I think, impacted some real change.”

Luxembourg Prime Minister Jean-Claude Juncker said after chairing a nine-hour meeting of the currency bloc’s finance ministers that while the immediate loan will be channeled through Spain’s bank-restructuring agency, the goal is to eventually recapitalize lenders directly with euro-area bailout funds. Yields on Spanish 10-year notes declined 25 basis points to 6.81 percent at 12:04 p.m. in New York.

U.K. Manufacturing

Factory output in the U.K. rose 1.2 percent in May, the most in a year, compared with a 0.8 percent fall in April. The median estimate of 26 economists surveyed by Bloomberg News called for a decline of 0.1 percent.

The trailing 12-month global default rate for speculative- grade, or high-yield, high-risk, companies climbed to 2.7 percent at the end of the second quarter, up from 2.5 percent at the end of March, Moody’s Investors Service said in a report today. The historical average default rate since 1983 is 4.8 percent, the ratings agency said.

Including two company defaults in June, a total of 33 corporate-debt issuers have defaulted this year. Moody’s distressed index, which measures the percentage of high-yield issuers with debt trading at distressed levels, rose to 19.5 percent at the end of June from 17.2 percent after the first quarter, according to the report. That compares with a year-ago rate of 9.5 percent.

Stock Volatility

High-yield debt, particularly bonds rated in the first few levels below investment-grade, is becoming more attractive to investors searching for steady returns amid stock market volatility, Zane Brown, a fixed-income strategist at Lord Abbett & Co. in Jersey City, New Jersey, said in a telephone interview.

“We are seeing a lot of cash that ordinarily might at some point find its way to the stock market, be invested instead in the credit markets,” Brown said. “This is people reluctantly putting their money to work, uncertain of what’s going on in the equity markets, wanting to take on some risk, but not too much risk.”

Speculative-grade bonds are rated below Baa3 by Moody’s and lower than BBB- by Standard & Poor’s.

AMD Earnings

AMD, the second-biggest maker of processors for personal computers, said yesterday that sales fell 11 percent in the second quarter to $1.41 billion, missing the average estimate of $1.63 billion called for by analysts in a Bloomberg News survey. The cost to guard against losses on the debt of AMD rose 20.8 basis points to a mid-price of 515.8 basis points at 5:09 p.m. in New York, Bloomberg prices show. That’s the highest price since the contracts closed at 522.3 basis points on June 6.

The swaps gauge, which declined 2.7 basis points July 3, 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: Brooke Sutherland in New York at

To contact the editor responsible for this story: Alan Goldstein at

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Companies Mentioned

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    (Advanced Micro Devices Inc)
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