Bloomberg News

Credit Swaps in U.S. Decline on Prospect of ECB Bond Purchases

July 27, 2012

A gauge of U.S. company debt risk fell the most since November after two European Central Bank officials said ECB President Mario Draghi will meet with Bundesbank President Jens Weidmann on plans to reduce soaring borrowing costs in countries such as Spain and Italy.

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, dropped 6.2 basis points to a mid-price of 105.1 basis points at 5:09 p.m. in New York, according to prices compiled by Bloomberg. Contracts tied to Sprint Nextel Corp. (S:US) fell to the lowest since September and those on Expedia Inc. (EXPE:US) dropped the most since 2009.

Investors are looking to euro-area leaders to stem the region’s fiscal crisis and avert a contamination of global balance sheets. French President Francois Hollande and German Chancellor Angela Merkel said today their nations are “bound by the deepest duty” to keep the currency bloc intact, echoing a commitment made yesterday by Draghi.

“For Europe, it will take a while for all their austerity measures to be put in place and take hold and help their debt balances,” Greg Tornga, head of fixed income at Edge Asset Management in Seattle, which manages about $20 billion, said in a telephone interview. “The union being more of a union and Hollande and Merkel announcing their intention and plans of how they want to get in place with buying Spanish and Italian debt is a positive.”

Bond Purchases

Spanish yields soared to a record this week, reaching levels that prompted bailouts for Greece, Portugal and Ireland and raising concern the nation might need a rescue of its own. The yield on Spain’s 10-year notes fell 18 basis points to 6.74 percent at 12:04 p.m. in New York.

“There was a serious danger that confidence keeps eroding” in Spain’s ability to repay debt, Nick Swenson, chief executive officer and portfolio manager at Minneapolis-based Groveland Capital LLC, which oversees $15 million, said in a telephone interview. “We’re reaching a tipping point.”

Draghi’s proposal involves Europe’s rescue funds buying government bonds on the primary market, flanked by ECB purchases on the secondary market to ensure transmission of its record-low interest rates, the officials said on condition of anonymity because the talks are private. Further ECB rate cuts and long- term loans to banks are also up for discussion, one of the officials said.

Draghi said yesterday policy makers will do whatever is needed to preserve the euro.

Insufficient Confidence

The credit-swaps index fell even as data today from the Commerce Department showed the U.S. economy expanded at a slower pace in the second quarter. Gross domestic product, the value of all goods and services produced, rose at a 1.5 percent annual pace in the period after a revised 2 percent first-quarter gain.

“We would definitely like it to be higher,” Tornga said of the U.S. GDP. “Given just the general sense of volatility and uncertainty, I don’t believe there is enough overall confidence in the market for consumers to spend more than what they really need to.”

The default premium on the Markit CDX North America High Yield Index, a measure of U.S. speculative-grade corporate debt risk, fell 29.3 basis points to a mid-price of 565.4 basis points, the lowest since March 28, Bloomberg prices show.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings declined 7.2 basis points to 162.8.

Expedia CDS

Credit-default swaps tied to Expedia, the online-travel company with $1.25 billion in outstanding bonds (EXPE:US), fell 18.7 basis points, the most since September 2009, to 191.4 basis points at 4:03 p.m. in New York, Bloomberg prices show. Second-quarter sales rose 14 percent to $1.04 billion, the Bellevue, Washington-based company said in a filing released after the close of equity markets yesterday.

The cost to guard against losses on the debt of Sprint has fallen 5.4 percentage points since July 25, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps tied to the Overland Park, Kansas-based company fell 1.6 percentage points today to 3.3 percent upfront, according to CMA. The contracts traded at 8.7 percent upfront on July 25.

Sprint, the third-largest U.S. wireless carrier, said yesterday second-quarter revenue jumped 6.4 percent to $8.84 billion, compared with an average estimate of $8.73 billion called for by analysts surveyed by Bloomberg.

The price of the swaps, which typically falls as investor confidence improves and rises as it deteriorates, means investors would have to pay $330,000 initially and $500,000 annually to protect $10 million of Sprint’s debt.

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

  • S
    (Sprint Corp)
    • $4.83 USD
    • 0.12
    • 2.48%
  • EXPE
    (Expedia Inc)
    • $86.08 USD
    • -0.96
    • -1.12%
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