A gauge of U.S. corporate credit risk held at about a two-week low after data showed initial jobless claims rose more than forecast, stoking speculation that the Federal Reserve will take new stimulus measures.
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 0.2 basis point to a mid-price of 108.1 basis points, prices compiled by Bloomberg show. Contracts tied to Morgan Stanley jumped the most in seven months after the bank reported a 50 percent drop in earnings, while those on Southwest Airlines Co. (LUV:US) fell to a two-month low after a 42 percent profit gain.
Investors are seeking more growth initiatives from the central bank as concern builds that the economic recovery will stumble, pressuring companies’ balance sheets and their ability to repay borrowings. Data from the Labor Department today showed that applications for unemployment benefits rose to 386,000 last week from 350,000 the previous period.
“The market expects the Fed to do something,” Sharon Stark, chief market strategist at Sterne Agee & Leach Inc. in Birmingham, Alabama, said in a telephone interview. “It’s tough for the economy to gain any momentum if you’re not creating jobs and there are more people filing for unemployment.”
Economists had called for 365,000 initial claims in the week ended July 14, according to the median estimate in a Bloomberg News survey. The volatility was tied to shifts in the timing of automobile plants’ seasonal layoffs, according to a Labor Department spokesman.
Fed Chairman Ben S. Bernanke completed his second day of testimony to Congress yesterday in his semi-annual report on the economy and monetary policy. Bernanke said the central bank is prepared to use easing tools, including asset purchases, to combat potential stalled progress in reducing unemployment.
The Federal Reserve Bank of Philadelphia’s general economic index showed manufacturing in the region contracted for the third consecutive month. Sales of existing homes dropped 5.4 percent in June to a 4.37 million annual rate, a separate report from the National Association of Realtors showed today in Washington.
Moody’s Investors Service Liquidity-Stress Index for speculative-grade companies fell to 3.4 percent in the second week of July from 3.6 percent in June, analysts for the ratings company led by Tom Marshella said in a research note dated July 18. The index, which declines when liquidity positions improve, reached a record low 3.3 percent in May.
Liquidity conditions for high-yield companies were healthy even as the number of credit-rating downgrades outpaced upgrades, according to the report.
Southwest, the biggest low-fare carrier, reported second- quarter net income of $228 million, or 30 cents a share, up from $161 million, or 21 cents, in the year-earlier period.
The cost to guard against losses on the debt of Southwest dropped 5.4 basis points to a mid-price of 154.6 basis points, the lowest since May 10, Bloomberg prices show.
Morgan Stanley (MS:US), the sixth-largest U.S. bank by assets, said second-quarter earnings dropped to $591 million, or 29 cents a share. Excluding accounting adjustments tied to the New York- based bank’s own credit spreads, profit was 16 cents a share, missing the 29-cent average estimate of 20 analysts in a Bloomberg News survey.
Credit swaps tied to Morgan Stanley climbed 28 basis points to 359 basis points, according to data provider CMA. That’s the biggest jump since the contracts climbed 34 basis points Dec. 8.
The contracts typically fall as investor confidence improves and rise 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.
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