Bloomberg News

Credit Swaps in U.S. Rise as Spanish Yields Climb on Fiscal Woes

July 20, 2012

A gauge of U.S. company debt risk rose for the first time in four days after approval of a bank bailout failed to stop a surge of Spanish bond yields, escalating concern that Europe’s fiscal turmoil is intensifying.

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, jumped by the most in two weeks, climbing 3.3 basis points to a mid-price of 111.3 basis points at 5:01 p.m. in New York, according to prices compiled by Bloomberg. Contracts tied to Citigroup Inc. (C:US) and Bank of America Corp (BAC:US). climbed the most since May.

A worsening recession in Spain and heightened demands on government rescue funds are fueling investor concerns that Europe’s crisis will slow the global economy, constraining borrowers’ ability to repay debt. Spanish government bond yields jumped to the highest since the creation of the euro, even after the currency bloc’s finance chiefs agreed to make emergency loans available for the nation’s lenders.

“The deal reached for Spain’s banks was a disappointment,” Brian Jacobsen, who helps oversee $204 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin, wrote in an e-mail. “It’s another case of two steps forward and two steps back.”

Euro-area finance chiefs signed off today on a bailout of as much as 100 billion euros ($122 billion) for Spanish lenders. Officials are still debating whether the burden of the loans will be assumed by the government or the banks.

Emergency Fund

Gross domestic product will decline 0.5 percent in 2013, compared with a 0.2 percent gain the government called for on April 27, Spain Budget Minister Cristobal Montoro said after the Cabinet met in Madrid. Valencia, one of the nation’s most indebted states, said today it would need to tap an 18 billion- euro emergency-loan fund created by the government last week.

Spanish five-year note yields jumped 47 basis points, or 0.47 percentage point, to 6.88 percent at 12:04 p.m. in New York, after touching 6.903 percent, the most since the euro started in 1999. The gap between Spanish and German 10-year bond yields widened to 613 basis points today, the most since Bloomberg began compiling the data in 1993.

The cost to guard against losses on the debt of Citigroup climbed 12.9 basis points to a mid-price of 261.1 basis points at 4:58 p.m. in New York, Bloomberg prices show. That’s the biggest jump since the contracts surged 13.4 basis points on May 11. Bank of America’s credit-default swaps soared 13.3 basis points, the most since May 30, to a mid-price of 262.7 basis points.

Credit swaps typically rise as investor confidence deteriorates and fall as it improves. The contracts 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

Too Cool for Crisis Management

Companies Mentioned

  • C
    (Citigroup Inc)
    • $51.8 USD
    • 0.39
    • 0.75%
  • BAC
    (Bank of America Corp)
    • $16.72 USD
    • 0.12
    • 0.72%
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